OGCI Training, Inc. v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas ( 2017 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-16-00704-CV
OGCI Training, Inc., Appellant
v.
Glenn Hegar, Comptroller of Public Accounts of the State of Texas; and
Ken Paxton, Attorney General of the State of Texas, Appellees
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
NO. D-1-GN-14-005375, HONORABLE STEPHEN YELENOSKY, JUDGE PRESIDING
MEMORANDUM OPINION
This interlocutory appeal arises from a franchise-tax protest suit filed in district
court by OGCI Training, Inc. (“OGCI”) against the Comptroller of Public Accounts. See Tex. Civ.
Prac. & Rem. Code § 51.014(a)(8) (permitting interlocutory appeal from order granting or denying
plea to jurisdiction by governmental unit). The Comptroller filed a partial plea to the jurisdiction
asserting that (1) OGCI’s live pleadings included a claim that “[OGCI’s] in-person training sessions
were performed by third-party contractors, and not OGCI” and (2) OGCI had failed to sufficiently
preserve this claim under Chapter 112 of the Texas Tax Code. See Tex. Tax Code §§ 112.001-.156
(taxpayers’ suits). In addition, the Comptroller sought to dismiss for lack of standing OGCI’s “claim”
that OGCI had recently filed another amended tax report and that it intended to recover $17,082.88
through that administrative process. After the district court granted the plea, OGCI appealed to
this Court.
Because we conclude that OGCI’s allegations regarding its intention to seek
additional recovery through a separate administrative process do not implicate jurisdictional issues
in this suit, we reverse that portion of the district court’s order dismissing this “claim.” Further,
because we conclude that the pleadings do not affirmatively negate jurisdiction over OGCI’s claim
regarding the use of independent contractors, we reverse the district court’s order dismissing this
claim and remand the cause to give OGCI the opportunity to replead.
BACKGROUND
Franchise-tax apportionment
Texas imposes a franchise tax on each taxable entity that does business in this
state or that is chartered or organized in this state. See Tex. Tax Code § 171.001(a). The franchise
tax is a tax on the value and privilege of doing business in Texas. Combs v. Newpark Res., Inc.,
422 S.W.3d 46, 47 (Tex. App.—Austin 2013, no pet.). Generally, an entity’s tax liability is
calculated by first determining the entity’s “margin,” which is primarily derived from the entity’s
total revenue, minus any deductions allowed under Chapter 171 of the Tax Code. See In re Nestle
USA, Inc., 387 S.W.3d 610, 615 (Tex. 2012) (explaining that “margin” is entity’s total revenue
minus general deduction); Newpark Res., 422 S.W.3d at 47-48 (“After calculating total revenue, a
taxable entity may take one of three general deductions . . . .”); see also Tex. Tax Code § 171.1011
(calculation of total revenue). The entity’s “taxable margin” is then determined by apportioning
the entity’s margin to its business in Texas. See Tex. Tax Code §§ 171.101(a)(2), .106; see also
In re Nestle, 387 S.W.3d at 615 (explaining that “taxable margin” is entity’s margin multiplied
by percentage of gross receipts from Texas business). Finally, the entity’s tax liability is calculated
2
by multiplying the entity’s taxable margin by the statutory franchise-tax formula. Tex. Tax Code
§ 171.002(a) (setting rate of franchise tax as percent of taxable margin).
Apportionment is accomplished by “multiplying [the] business’s total margin by an
apportionment factor designed to limit the franchise tax to revenue attributable to business in
Texas.” Hallmark Mktg. Co. v. Hegar, 488 S.W.3d 795, 796 (Tex. 2016). The apportionment factor
numerator is the taxable entity’s gross receipts from business done in Texas and the denominator is
the taxable entity’s gross receipts from its entire business. See Tex. Tax Code § 171.106(a). When
a taxable entity derives more of its gross receipts from business in Texas, relative to its total receipts,
the entity’s apportionment factor increases. Conversely, when that same entity generates less of its
gross receipts from business in Texas, its apportionment factor decreases, and assuming its margin
is unchanged, its taxable margin decreases. In other words, under Chapter 171 of the Tax Code,
doing more business in Texas generally results in higher franchise taxes. Southwestern Bell Tel. Co.
v. Combs, 270 S.W.3d 249, 258 (Tex. App.—Amarillo 2008, pet. denied).
To determine gross receipts from business done in Texas, a business must
include receipts from “each service performed in this state.” Tex. Tax Code § 171.103(a)(2). The
Comptroller’s rules provide that receipts from sales of a service are apportioned to the location
where the service is performed. 34 Tex. Admin. Code § 3.591(e)(26) (2017) (Tex. Comptroller of
Pub. Accounts, Margin: Apportionment). “It [is] the localization of the transaction in Texas and
not the place of physical handing over or receiving of money that [is] significant.” Westcott
Commc’ns Inc. v. Stayhorn, 104 S.W.3d 141, 146 (Tex. App.—Austin 2003, pet. denied) (quoting
Humble Oil & Refining Co. v. Calvert, 414 S.W.2d 172, 180 (Tex. 1967)). If services are performed
3
both inside and outside Texas, then such receipts are apportioned as Texas receipts on the basis
of the fair value of the services that are rendered in Texas. 34 Tex. Admin. Code § 3.591(e)(26).
Consequently, the apportionment factor for services performed in Texas is calculated according to
the following formula:
apportionment factor for services = fair value of services performed in Texas/
fair value of services of performed everywhere
See id.
Administrative Proceedings
OGCI is a foreign corporation headquartered in Tulsa, Oklahoma and authorized to
do business in Texas. According to OGCI, it “provides comprehensive educational development
services to large petroleum companies.” Specifically, OGCI “develop[s] individualized training
programs for OGCI’s clients’ employees that will advance the employees’ technical skills,” and
“develop[s] the curriculum for technical training courses, which are attended by the employees of
OGCI’s clients.” According to OGCI, these services are performed at OGCI’s corporate and
operational office in Oklahoma. The developed curriculum is later delivered through live-training
courses, at least some of which are conducted in Texas.
In its 2009 Texas Franchise Tax report, OGCI reported approximately $35 million
in total gross receipts and $10 million in receipts from services performed in Texas. OGCI claimed
a cost-of-goods-sold (COGS) deduction and calculated an apportionment factor of 30.32%. The
report was reviewed by Comptroller staff, who concluded that OGCI did not qualify for the COGS
4
deduction.1 The Comptroller staff made no change, however, to OGCI’s apportionment factor. The
elimination of the COGS deduction resulted in an assessment of $42,058 in additional tax due, plus
a penalty of $4,206 and interest. See Tex. Tax. Code § 111.008.
OGCI filed an administrative petition for redetermination, see id. § 111.009(a), which
was heard on the parties’ written submissions by an administrative law judge (ALJ) with the
State Office of Administrative Hearings (SOAH), id. §§ 111.009(c), .00455. In these proceedings,
OGCI conceded that it was not entitled to the COGS deduction. However, OGCI asserted that its
tax liability was nevertheless overstated because OGCI had made an error in its 2009 Texas
Franchise Tax report with respect to the apportionment factor. In its Statement of Grounds for
redetermination, OGCI argued that it had “erroneously sourced a significant amount of OGCI’s
receipts to Texas” by failing to utilize a cost-of-performance analysis to determine the fair market
value of services rendered in Texas.2 OGCI explained that its “services are performed both inside
and outside of Texas” and that “[its] Oklahoma corporate office directs the activities of the Company’s
1
An entity that provides goods may take a COGS deduction for “‘all direct costs of
acquiring or producing the goods,’ some indirect costs like insurance, utilities and quality control,
and up to 4% of other ‘indirect or administrative overhead costs.’” Combs v. Newpark Res., Inc.,
422 S.W.3d 46, 47-48 (Tex. App.—Austin 2013, no pet.) (summarizing COGS deduction); see Tex.
Tax Code § 171.1012 (COGS deduction). The Comptroller determined that OGCI provides services
rather than goods and, consequently, does not qualify for the COGS deduction.
2
According to OGCI, the cost-of-performance method has previously been recognized by
the Comptroller in similar cases as a valid method for apportioning service revenue. See, e.g.,
Hearing Decision No. 13,734, Texas Comptroller of Public Accounts (February 24, 1983); Letter
No. 200807139L, Texas Comptroller of Public Accounts (July 24, 2008). OGCI describes the
apportionment factor for services as a ratio of the costs attributable to performance in Texas
compared to the costs attributable to services performed everywhere. In deciding the jurisdictional
issue before us, we do not consider the merits of any of OGCI’s underlying claims and express no
opinion on the validity of the cost-of-performance method or the applicability of this method to the
facts alleged.
5
multi-state training offerings, inclusive of those in Texas, providing support, marketing, and the
overall development and creation of the OGCI training materials.” OGCI requested permission to
recalculate its apportionment factor to account for the costs attributable to its services performed in
Oklahoma for the 2009 tax year, which according to OGCI were substantial compared to those costs
attributable to its services performed in Texas.
The ALJ issued its proposal for decision, which the Comptroller approved and
adopted in all respects as his final decision. In his decision, the Comptroller rejected OGCI’s argument
that an adjustment of the apportionment factor was necessary with respect to the training services in
Texas. In part, the Comptroller concluded that OGCI’s live-training sessions were wholly performed
in Texas and that no apportionment to account for OGCI’s activities in Oklahoma was necessary.
See id. § 171.103(a)(2). As a result, under the Comptroller’s decision, all of the receipts generated
by the live-training sessions in Texas qualified as “receipts from business done in Texas.” See
34 Tex. Admin. Code § 3.591(e)(26) (explaining that apportionment is necessary based on fair value
of services when services are performed both inside and outside of Texas). In his decision, the
Comptroller explained that:
A receipt will be considered a Texas receipt if “the act done or the property
producing the income must be located in Texas.” Humble Oil & Ref. Co. v. Calvert,
414 S.W.2d 172, 180 (Tex. 1967). Services performed within Texas are units of
service sold, the performance of which occurs within Texas, and the focus is on the
specific, end-product acts for which the customer contracts and pays to receive, not
on nonreceipt-producing, albeit, essential, support activities. See Comptroller’s
Decision No. 10,028 (1980).
....
6
. . . The training services at issue were provided in Texas. [OGCI]’s
Oklahoma headquarters was involved in preparing and marketing the services, but
the “act done” that produced the revenues at issue was performed completely in
Texas. The acts done at [OGCI]’s headquarters were undoubtably necessary and
essential to the creating and marketing of the training services it sold in 2009.
However, [OGCI] conflates what were essentially preparatory, non-receipt producing
acts that were necessary to create a sellable product with the act that was done to
produce the receipts at issue. [OGCI]’s “cost allocation” argument is not consistent
with the methodology outlined by the Tax Policy Division. More importantly, the
argument is not consistent with the requirements of Texas Tax Code Chapter 171.
Franchise-Tax Protest Suit
On September 24, 2014, OGCI paid the full amount of the assessed tax under protest
and attached a protest letter outlining its reasons for recovering payment. See Tex. Tax Code § 112.051
(authorizing protest payment). OGCI then filed suit to recover the protest payment, as permitted
by section 112.052 of the Tax Code. See id. § 112.052 (authorizing taxpayer suit after payment
under protest).
The Comptroller filed a partial plea to the jurisdiction, requesting that the district
court dismiss OGCI’s franchise-tax protest suit to the extent OGCI was attempting to raise a ground
in the district court proceedings that it had not adequately preserved. Specifically, the Comptroller
challenged allegations in OGCI’s petition stating that the creation of the course materials and the live
delivery of the courses in Texas is completed by third-party instructors under a contractual agreement
with OGCI. The Comptroller argued that this ground—“that third-party contractors, rather than
OGCI, had performed in Texas”—amounted to a new or different ground that OGCI had not
presented in its protest letter and that, consequently, the district court did not have jurisdiction to
consider. The Comptroller also complained that OGCI lacked standing to state in its petition that it had
7
filed an amended franchise-tax report reflecting an additional overpayment that “is not part of the
instant protest claim” and that OGCI intended to recover this overpayment in a separate refund suit.
In response, OGCI argued that the requested relief and the grounds for recovery
presented in its petition remained the same as those presented in its protest letter. OGCI explained
that its factual allegations concerning OGCI’s use of independent instructors simply supported
OGCI’s consistently made argument that “the Comptroller’s apportionment theory improperly
ignores the true nature of its work, most of which is performed . . . in Oklahoma.” With respect to
OGCI’s allegations regarding the amended franchise-tax report and additional overpayment, OGCI
explained that it is seeking recovery of that overpayment in a separate, subsequent proceeding—not
in this proceeding—and that “the fact [was] included in OGCI’s petition simply to put the
Comptroller on notice of this separate claim.” Thus, according to OGCI, “the concepts of standing
and ripeness . . . are inapplicable to this statement.”
The district court granted the Comptroller’s partial plea to the jurisdiction, concluding
that it “lacks subject-matter jurisdiction over paragraphs numbered 17 and 54 in Plaintiff’s Second
Amended Petition” and that “it lacks subject-matter jurisdiction over Plaintiff’s claim seeking
recovery on the grounds that its live-training sessions were delivered or performed by third-party
or independent contractors.”3
3
Paragraph 17 states, “OGCI filed the amended Texas Franchise Tax Report with the Texas
Comptroller of Public Accounts as an administrative refund claim seeking to recover $17,082.88 in
additional franchise tax, plus interest thereon, for report year 2009. OGCI intends to recover the
$17,082.88 through the administrative process and addresses it herein solely for the purpose of
notifying Defendants of the existence of the administrative refund claim. The $17,082.88 is in addition
to the amount sought in this state court proceeding.” Paragraph 54 states, “The Risk/Reward
instructors’ receipt-producing activities arise from writing the course materials and delivering the
8
DISCUSSION
Standard of Review
On appeal, OGCI asserts that the district court erred in granting the Comptroller’s
plea to the jurisdiction. A plea to the jurisdiction is a dilatory plea that challenges the district court’s
subject-matter jurisdiction over a case without regard to whether the claims have merit. Harris Cty.
v. Sykes, 136 S.W.3d 635, 638 (Tex. 2006); Bland Indep. Sch. Dist. v. Blue, 34 S.W.3d 547, 554
(Tex. 2000). Because whether a court has subject-matter jurisdiction is a question of law, we review
a trial court’s ruling on a plea to the jurisdiction under a de novo standard of review. Houston Belt
& Terminal Ry. Co. v. City of Houston, 487 S.W.3d 154, 160 (Tex. 2016).
In reviewing a trial court’s ruling on a plea to the jurisdiction, we begin our analysis
with the plaintiff’s live pleadings and determine whether the facts alleged affirmatively demonstrate
that jurisdiction exists. Texas Dep’t of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 226 (Tex.
2004). We construe the plaintiff’s pleadings liberally, taking all factual assertions as true and
looking to the plaintiff’s intent. Id. If the pleadings fail to allege sufficient facts to affirmatively
demonstrate the trial court’s jurisdiction but do not affirmatively demonstrate incurable defects in
jurisdiction, the issue is one of pleading sufficiency, and the plaintiff should be afforded the
opportunity to amend. Id. at 226-27. However, “if the pleadings affirmatively negate the existence
of jurisdiction, then a plea to the jurisdiction may be granted without allowing the [plaintiff] the
opportunity to amend.” Id. at 227.
course at the live training sessions. In contrast, OGCI’s receipt-producing activities arise from the
services OGCI provides outside of Texas both before and after the courses are delivered by the
Risk/Reward instructors.”
9
To the extent resolution of the jurisdictional issues in this case turns on statutory
construction, we also review these questions de novo. See First Am. Title Ins. Co. v. Combs,
258 S.W.3d 627, 632 (Tex. 2008). When construing a statute, our primary objective is to ascertain
and give effect to the legislature’s intent. Iliff v. Iliff, 339 S.W.3d 74, 79 (Tex. 2011); Galbraith
Eng’g Consultants, Inc. v. Pochucha, 290 S.W.3d 863, 868 (Tex. 2009). In ascertaining that intent,
we rely on the plain meaning of the words in the statute “unless a different meaning is supplied by
legislative definition or is apparent from the context, or unless the plain meaning would lead to
‘absurd results.’” City of Rockwall v. Hughes, 246 S.W.3d 621, 625-26 (Tex. 2008); see Tex. Gov’t
Code § 311.011. “Where text is clear, text is determinative of that intent.” Entergy Gulf States, Inc.
v. Summers, 282 S.W.3d 433, 437 (Tex. 2009).
Subject-Matter Jurisdiction in Protest-Payment Suits
Sovereign immunity protects the State and its agencies from lawsuits unless the State,
through its legislature, expressly consents to the suit. Texas Natural Res. Conservation Comm’n v.
IT-Davy, 74 S.W.3d 849, 854 (Tex. 2002). In the absence of a clear, unambiguous waiver, sovereign
immunity deprives Texas courts of subject-matter jurisdiction. State v. Shumake, 199 S.W.3d 279,
283 (Tex. 2006). Section 112.052 of the Tax Code operates as a waiver of the State’s immunity in
franchise-tax protest suits, so long as the taxpayer strictly complies with the statute’s administrative
and procedural requirements. See Sanadco Inc. v. Office of the Comptroller of Pub. Accounts,
No. 03-11-00462-CV, 2015 WL 1478200, at *5 (Tex. App.—Austin Mar. 25, 2015, pet. denied)
(mem. op.) (citing In re Nestle, 359 S.W.3d at 211).
10
Under section 112.052, a taxpayer seeking to initiate a franchise-tax protest suit
must first pay the amount assessed and submit with the tax payment a protest letter. Tex. Tax Code
§ 112.052. The taxpayer must then file suit within 90 days of the date the protest payment is made.
Id. With respect to the protest letter, section 112.051 states, “The protest must be in writing and
must state fully and in detail each reason for recovering the payment.” Id. § 112.051(b). Under
section 112.053, the issues to be determined in the protest-payment suit are “limited to those arising
from the reasons expressed in the written protest as originally filed.” Id. § 112.053(b).
As this Court has explained, the franchise-tax protest statute’s requirements serve
two purposes. See Lawrence Indus., Inc. v. Sharp, 890 S.W.2d 886, 892 (Tex. App.—Austin 1994,
no writ). First, the requirements allow the Comptroller the first opportunity to determine the merits
and validity of the taxpayer’s protest. Id. (citing James v. Consolidated Steel Corp., 195 S.W.2d 955,
962 (Tex. Civ. App.—Austin 1946, writ ref’d n.r.e.)). Second, the statute’s requirements “prevent
the taxpayer, after he files suit, from changing to or asserting upon the trial court other or different
grounds from those stated in his protest.” Consolidated Steel Corp., 195 S.W.2d at 962. In other
words, the requirements “prevent [the taxpayer] after making protest from subsequently taking
advantage of the collecting agency upon such trial by ‘changing horses.’” Id.; see Local Neon Co.,
Inc. v. Strayhorn, No. 03-04-00261-CV, 2005 WL 1412171, at *5 (Tex. App.—Austin June 16,
2005, no pet.) (mem. op.) (quoting Consolidated Steel Corp., 195 S.W.2d at 962). A protest letter
is sufficient under section 112.051 when it puts the Comptroller on notice of the legal basis for
the taxpayer’s claim, see Hegar v. Ryan, No. 03-13-00400-CV, 2015 WL 3393917, at *10 (Tex.
App.—Austin May 20, 2015, no pet.) (mem. op.), without requiring the protesting taxpayer to state
11
all the evidence on which he relies to support that legal basis, see Consolidated Steel Corp.,
195 S.W.2d at 962.
In this case, there is no dispute that OGCI’s protest letter is sufficiently detailed and
generally meets the requirements of section 112.051, at least with respect to the grounds raised.
Instead, the issue before this Court, as it was before the district court, is whether OGCI, in its protest
suit, has asked the district court to decide issues that “aris[e] from the reasons expressed in [its]
written protest.” See Tex. Tax Code § 112.053. To the extent OGCI’s issues do not “arise from the
reasons expressed in [OGCI’s] written protest,” the district court is without jurisdiction to resolve
those issues. As a result, we begin our jurisdictional analysis by reviewing OGCI’s protest letter and
its stated reasons for recovery.
In its protest letter, OGCI argued that the assessed tax was incorrect because “the
undisputed factual record demonstrates that OGCI performs receipt-producing activities both in
Oklahoma and Texas, and the Tax Claim therefore fails to properly apportion OGCI’s receipt-
producing activities.” As it had done in the administrative proceedings that preceded OGCI’s protest
payment, OGCI challenged the Comptroller’s conclusion that the training services were wholly in
Texas and the Comptroller’s characterization of OGCI’s Oklahoma services as merely “support
activities.” In its protest letter, OGCI stated the following:
Characterizing OGCI’s services as solely the live training sessions OGCI provides
in Texas, as the Comptroller does, ignores the undisputed factual record which
conclusively establishes that the live training sessions are only a part of the services
OGCI’s clients pay OGCI to provide. The content of OGCI’s training services—the
core of what OGCI’s clients are paying for—is developed in OGCI’s Oklahoma
operational center.
12
....
. . . The basis for the Tax Claim, by placing an exclusive focus on OGCI’s
live training in Texas, ignores an essential part of the services provided by OGCI to
its clients. OGCI’s receipt-producing activity is not solely the live training it offers;
it is also the creation of the content of the training and of the training materials in a
series of integrated, interdependent steps to the satisfaction of OGCI’s clients. The
most significant portion of OGCI’s performance, in fact, is the development of
content and thought leadership for its training and instructional materials; the in-
person training serves as a delivery vehicle for this content and thought leadership.
OGCI explained that because receipt-producing acts were also performed in Oklahoma, “the fair
value of the services rendered in Texas must be determined” by calculating the “ratio of the costs
incurred in performing the service inside of Texas to the costs incurred in performing outside of
Texas.” “Applied to the current matter,” OGCI states, “the costs of performance approach . . .
clearly establishes that the majority of OGCI’s costs to develop its training programs was incurred
in Oklahoma.” Specifically, OGCI asserted that it “incurred 61% of the costs for developing its
training programs in Oklahoma and only 39% of the costs in Texas.” In summary, OGCI’s complaint
to the Comptroller was two-fold: (1) that the Comptroller had erroneously concluded that the live-
training sessions performed in Texas were the only receipt-producing services provided by OGCI,
and (2) that the Comptroller should have instead apportioned OGCI’s training receipts as Texas and
non-Texas receipts and should have done so by comparing the costs attributable to the services
provided in Texas to the costs attributable to services provided outside of Texas.
Now, in its protest suit in district court, OGCI alleges that the live-training sessions
in Texas are carried out by independent, third-party instructors. Under the “Facts” section in its
petition, OGCI alleges that it “enters into arrangements with the [third-party] instructors to create
the course materials and to deliver the course and update the course materials as necessary” and
13
that “OGCI refers to instructors as Risk/Reward instructors because both OGCI and the instructors
incur costs to develop the courses and both are compensated for their services only if the courses are
profitable.” “Under the Risk-Reward arrangements, the instructors receive 2/3 of the net income
from the course as compensation for writing the course materials and delivering the course. OGCI
receives 1/3 of the net income from the course as partial compensation for the comprehensive
educational services OGCI provides.” “OGCI performs its services (i.e, the revenue-producing
activities) to develop the individualized training programs and to develop the course curriculum
primarily in Tulsa, Oklahoma.”
OGCI’s petition also includes a section labeled as “Count I” with the subheading
“The Assessed Tax Fails to Properly Apportion OGCI’s Taxable Margin.” In paragraphs 50 to 57
of “Count I,” OGCI alleges that the Comptroller failed to properly apportion OGCI’s taxable margin
because the Comptroller should have calculated OGCI’s apportionment factor to account for the
value of its services performed outside of Texas. Included among these paragraphs is paragraph 54,
which states:
The Risk/Reward instructors’ receipt-producing activities arise from writing the
course materials and delivering the course at the live training sessions. In contrast,
OGCI’s receipt-producing activities arise from the services OGCI provides outside
of Texas both before and after the courses are delivered by the Risk/Reward instructors.
The trial court granted the Comptroller’s partial plea to the jurisdiction specifically as to paragraph
54 and to OGCI’s “claim seeking recovery on the grounds that its live-training sessions were
delivered or performed by third-party or independent contractors.”
14
OGCI argues that the district court erred in its jurisdictional ruling because OGCI’s
allegations concerning its use of the third-party instructors fall squarely within the scope of the
district court’s jurisdiction under section 112.053. According to OGCI, section 112.053, when
properly construed, requires only “consistency between the legal grounds or theories presented at the
administrative level and the judicial level” and the legislature “did not intend to require that every
fact supporting those theories be stated exactly the same at both levels.” OGCI contends that the
legal ground or theory presented both to the Comptroller and to the district court is that the
Comptroller should have apportioned most of OGCI’s revenue to Oklahoma utilizing the cost-of-
performance method because that is where most of OGCI’s receipt-producing activities are
performed. OGCI argues that its live pleadings before the district court, including its factual
allegations concerning its use of third-party instructors, are wholly consistent with this theory.
In response, the Comptroller acknowledges that section 112.053 “allows for additional
factual development and further refinement of the legal issues,” but asserts that the reason “given
[by OGCI in its protest letter] in support of its challenge to the amount of Texas receipts [is] entirely
different from the one now set out in its live pleadings.” The Comptroller argues that the “reason”
given by OGCI in its protest letter is that OGCI performed some of its receipt-producing services
in Oklahoma and that the Comptroller should have apportioned OGCI’s receipts from the training
sessions in Texas by using the cost-of-performance formula, whereas OGCI is now “asserting for
the first time that the live training sessions in Texas were not provided by OGCI at all.” According to
the Comptroller, the district court does not have jurisdiction to consider this new issue because it
does not “arise from” the reasons set out in OGCI’s protest letter. See Tex. Tax Code § 112.053(b).
15
The Comptroller construes paragraph 54 as a contention that the live-training
sessions in Texas do not constitute receipt-producing services of OGCI at all because these services
are performed entirely by third-party instructors, not by OGCI. If this construction were correct, we
would agree that this legal ground for protest is inconsistent with the grounds stated in OGCI’s
protest letter, which focused on the Comptroller’s characterization of OGCI’s training sessions in
Texas as OGCI’s only receipt-producing act. Under the Comptroller’s construction of paragraph 54,
OGCI would have, in effect, shifted to an argument that it produced no receipts from the live-training
sessions in Texas, rather than merely claiming that the Comptroller failed to also account for the
value of its out-of-state services. Viewed under this construction, the Comptroller’s position and
the trial court’s ruling are reasonable. See Hegar v. Sunstate Equip. Co., No. 03-15-00738-CV,
2017 WL 279602, at *8 (Tex. App.—Austin Jan. 20, 2017, pet. filed) (mem. op.) (concluding that
complaint regarding tax rate could not be raised because it was not referenced in protest letter). This
potential interpretation of paragraph 54, however, does not end the inquiry.
We must, under the applicable standard of review, construe OGCI’s pleadings
liberally while looking to OGCI’s intent. See Miranda, 133 S.W.3d at 226. When viewed in that
light, we cannot conclude that OGCI’s pleadings affirmatively negate jurisdiction. Paragraph 54,
as discussed above, is part of a larger “Count I” in which OGCI takes issue with the Comptroller’s
calculation of its apportionment factor. When paragraph 54 is read in context with the other
paragraphs in Count I and the second amended petition as a whole, it appears that OGCI may, in fact,
have intended to plead a legal basis that comes within the scope of its protest letter. For example,
in paragraph 55, OGCI explains that “[its] receipt-producing activities occur both in Texas and
16
outside of Texas” and that Texas law requires that the Comptroller apportion OGCI’s Texas
receipts based on their fair value. In addition, in paragraphs 41 to 44, OGCI explains the role of the
“Risk/Reward” instructors and details how those instructors receive two-thirds of the net income
from a particular course, while OGCI receives one-third of the net income. Read in context, it appears
that OGCI’s intent in paragraph 54 may have been to explain that its apportionment factor should be
lowered to reflect the fact that OGCI’s receipt-producing activities occur primarily outside of Texas
and that it receives only one-third of the receipts from the training sessions performed in Texas.
Construed liberally, as we must, paragraph 54 would not be inconsistent with the
complaint OGCI made in its protest letter. To the extent OGCI now claims that its income
arrangements with its third-party instructors impact the calculations of its gross receipts, of its costs,
and ultimately of its apportionment factor, we conclude that this issue does “arise” from the reasons
presented in OGCI’s protest letter. These issues—how much OGCI collects from the training
sessions in Texas and how any apportionment of that revenue should be calculated—reasonably
relate to and are wholly consistent with the legal basis presented by OGCI in its protest letter
concerning the calculation of its apportionment factor. See Suleman v. McBeath, 614 S.W.2d 637,
639-40 (Tex. Civ. App.—Texarkana 1981, writ ref’d n.r.e.) (concluding that protest letter claiming
that “tax computation was erroneous” was sufficient to give trial court jurisdiction over computational
issues and that court could decide in pre-trial and trial proceedings whether certain evidence should
be admitted in support of claim); see also Consolidated Steel Corp., 195 S.W.2d at 962 (concluding
that protest letter that informed Commission that “[protestant] predicated its protest on specific
provisions of the law [and] providing the method of computation” was sufficiently detailed and that
“it was not necessary for the protestant to state all of the evidence on which it relied”).
17
Accordingly, although OGCI did not affirmatively demonstrate facts that establish
jurisdiction under Chapter 112 in paragraph 54, its pleadings do not affirmatively demonstrate
incurable defects in jurisdiction. See Miranda, 133 S.W.3d at 226-27. The issue at this stage of
the proceedings is one of pleading sufficiency, and the Comptroller has neither asserted nor
demonstrated that OGCI had a full and fair opportunity to amend its pleadings in the district court.
See id. We conclude that OGCI should be afforded the opportunity to amend its pleadings to address
these jurisdictional concerns.
Finally, we consider OGCI’s argument that the district court erred in dismissing
OGCI’s “claim,” set out in paragraph 17 of its live pleadings, that OGCI had filed an amended
franchise-tax report reflecting an additional overpayment that “is not part of the instant protest
claim.” In its plea to the jurisdiction, the Comptroller argued that OGCI did not have standing to
assert what the Comptroller considers to be “a hypothetical administrative claim.” The district court
agreed and struck the allegations from OGCI’s petition. On appeal, OGCI argues that the trial court
erred in striking the statement because it was “simply a background fact notifying the Comptroller
and the court about the existence of this claim” and because OGCI is not seeking any relief regarding
this overpayment in this proceeding.4 Although the relevance of OGCI’s allegations regarding the
additional overpayment and the separate administrative proceeding is unclear, we agree that because
OGCI is not seeking any relief for the injury in this proceeding, the propriety of the allegations is
not a jurisdictional issue. See Heckman v. Williamson Cty., 369 S.W.3d 137, 155-56 (Tex. 2012)
(explaining that to satisfy redressability requirement of standing, plaintiff must establish substantial
4
In his response brief, the Comptroller does not make any argument in support of the district
court’s decision to strike this statement from OGCI’s pleading.
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likelihood that requested relief will remedy alleged injury in fact). We conclude that the district
court erred in concluding that it did not have jurisdiction over the allegations made by OGCI in
paragraph 17 of its petition.
CONCLUSION
Because we have concluded that the district court erred in granting the Comptroller’s
plea to the jurisdiction, we reverse the district court’s order and remand this cause for further
proceedings, including an opportunity for OGCI to replead.
__________________________________________
Scott K. Field, Justice
Before Chief Justice Rose, Justices Field and Bourland
Filed: October 27, 2017
Reversed and Remanded
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