DocketNumber: NO. 03-15-00738-CV
Citation Numbers: 578 S.W.3d 533
Judges: Field, Pemberton, Puryear
Filed Date: 1/20/2017
Status: Precedential
Modified Date: 1/21/2022
Appellee Sunstate Equipment Co., LLC, a Delaware company with headquarters in Arizona, operates in several Texas metropolitan areas and rents heavy machinery to contractors, charging delivery and pick-up fees as part of its contracts. It pays franchise taxes and included its delivery and pick-up fees in its Cost-of-Goods-Sold ("COGS") deduction under section 171.1012 of the tax code. See Tex. Tax Code § 171.1012 ; see generally id. §§ 171.0001-.665 (provisions related to franchise tax). Appellant Glenn Hegar, Comptroller of Public Accounts of the State of Texas, conducted an audit and determined that the delivery and pick-up fees should not have been included in the COGS deduction, requiring Sunstate to pay almost $130,000 in taxes and almost *535$11,000 in penalties and interest. Sunstate paid those taxes under protest and filed suit seeking a refund of those sums. See id. §§ 112.051-.060 (taxpayer's suit after protest payment). The parties filed competing motions for summary judgment, relying on a limited stipulation of facts, and, without specifying the grounds on which it relied, the trial court granted summary judgment in favor of Sunstate, determining that Sunstate was entitled to include its delivery and pick-up costs in its COGS deduction
Standard of Review and Applicable Statutes
We review de novo a trial court's granting of summary judgment and, in the case of competing motions for summary judgment, consider all questions presented and render the judgment the court should have rendered. Mid-Century Ins. Co. v. Ademaj ,
A franchise tax is imposed on a taxable entity that does business in or is chartered or organized in Texas. Tex. Tax Code § 171.001(a).
*536Hegar v. CGG Veritas Servs. (U.S.), Inc. , No. 03-14-00713-CV,
Section 171.1012 provides that an entity may take a COGS deduction for "all direct costs of acquiring or producing the goods," including labor costs, "cost of materials that are an integral part of" the goods,
A COGS deduction is generally only available to the taxable entity that owns the "goods" in question.
Stipulated Facts
The parties' limited stipulation of facts agreed that between June 1, 2008, and March 31, 2011:
• Sunstate rented heavy construction and industrial equipment on an "as needed" basis and qualified as a heavy construction equipment rental or leasing company under section 171.1012(k-1)(2). Its contracts were generally short-term, from one day to multiple months, and its customers were usually subcontractors.
• Sunstate operated in the Houston, Dallas-Fort Worth, El Paso, Austin, and San Antonio areas, and most of its customers could not pick up and return the equipment. Sunstate typically delivered its rental equipment to the construction site and picked it up at the end of the rental term (in about eighty percent of its contracts). Sunstate included separate delivery and pick-up charges in the rental fees it charged.
• Sunstate bought and maintained a fleet of delivery vehicles, hired employees to do the pick-ups and deliveries, and maintained facilities to store the delivery vehicles, incurring labor expenses for the delivery employees, vehicle depreciation, property taxes and insurance costs on the vehicles and related property, and fuel and maintenance expenses for the fleet.
• If Sunstate had not delivered and picked up the equipment, it would not have made any rental revenues, and "the delivery and pick-up component of Sunstate's business activity was an integral part of its business operations."
• In computing its franchise tax liability, Sunstate deducted its COGS from its total revenue. Sunstate was audited for franchise tax compliance in 2008 and 2009, and the Comptroller disallowed the delivery and pick-up costs as part of the COGS deduction, recategorizing some of the asserted COGS as indirect or administrative costs. The Comptroller then assessed deficiencies of $54,776.48 for 2008 and $74,886.05 for 2009, plus penalties and interest. Sunstate exhausted its administrative remedies and paid the alleged deficiencies, penalties, and interest under protest.
Discussion
The Comptroller asserts that (1) Sunstate's delivery and pick-up fees may not be included in its COGS deduction under subsections 171.1012(c), (d), (e), (f), or (k-1); (2) those fees did not constitute labor furnished to a project so as to qualify them as a COGS deduction under subsection 171.1012(i); and (3) the trial court "otherwise err[ed]" in granting summary judgment for Sunstate and denying the Comptroller's motion for summary judgment.
Subsection 171.1012(k-1)
Under section 171.1012(k-1), "[n]otwithstanding any other provision of this section," Sunstate may deduct "the costs otherwise allowed by this section in relation to tangible personal property that [Sunstate] rents or leases in the ordinary course of business." See
Sunstate argues that our focus in interpreting section 171.1012 should be on Sunstate's revenue, while the Comptroller contends that our focus must be on the goods. We agree with the Comptroller that Sunstate is attempting to invert the legislature's chosen phrasing and rewrite the statute to allow a heavy equipment rental company to subtract costs "in relation to the rental or leasing of tangible personal property," rather than allowing such an entity to subtract costs "in relation to tangible personal property that the entity rents or leases." See Tex. Tax Code § 171.1012(k-1).
In its motion for summary judgment, Sunstate argued that the phrase "renting or leasing the heavy equipment" should be substituted in for "goods" throughout section 171.1012. Thus, subsection (k-1) would allow it to deduct " 'all direct costs of [renting or leasing] the [heavy equipment],' including the direct costs enumerated in" subsection 171.1012(c); "additional costs 'in relation to' the rented or leased equipment" as enumerated in subsection 171.1012(d), including "post-leasing direct costs including storage and handling costs, the costs of insurance on facilities or equipment, and utilities expenses"; and "up to 4% of all 'indirect or overhead costs ... allocable to the [renting or leasing of the equipment]' " under subsection 171.1012(f). Sunstate asserted that subsection 171.1012(c)'s list of "direct" costs is not exclusive and that it was "entitled to include 'all' direct costs whether or not such costs are specifically enumerated" in subsection (c). It further claimed that its delivery and pick-up costs could be either direct or additional costs because its customers generally could not pick up or return the equipment themselves and thus would not have rented the equipment if Sunstate had not provided those "necessary costs of [its] business."
Sunstate asserts that it should be allowed these asserted COGS deductions because without providing delivery and pick-up services, it could not operate its business and, therefore, those costs "are direct costs incurred as an integral part" of its business. This, however, overlooks the legislature's clear distinction between costs a business incurs to obtain the goods it will sell, whether through production or acquisition, and costs it incurs in selling or distributing the goods. See
*539The supreme court recently said that in considering a tax statute, we "should not disregard the economic realities underlying the transactions in issue." Combs v. Roark Amusement & Vending, L.P. ,
Bearing these rules in mind, we agree instead with the Comptroller's interpretation of the statute, which is that Sunstate may deduct "all direct costs of acquiring or producing the [heavy construction equipment]" that forms the basis of Sunstate's business, as well as additional costs "in relation to the taxable entity's [heavy construction equipment]." See Tex. Tax Code § 171.1012(c), (d), (k-1). This reading of the statute is logical and consistent with the apparent purpose of subsection (k-1)-to extend to renters of heavy equipment the same COGS deductions available to a company that sells identical equipment. It makes little sense to allow a rental company a broader COGS deduction than is available to sellers of the same equipment, who are limited to deducting their costs of obtaining the equipment. Nowhere in the language of this statute or the circumstances surrounding its enactment do we find an indication that the legislature intended to grant a heavy equipment rental company a COGS deduction for every cost associated with the company's chosen business model. See Health Care Servs. ,
We hold that by providing that companies such as Sunstate "may subtract as a cost of goods sold the costs otherwise allowed by this section in relation to tangible personal property that the entity rents or leases in the ordinary course of business," the legislature intended to extend the COGS deduction to allow such companies to deduct their costs of obtaining the equipment they then rent out. The question *540that remains is whether Sunstate's delivery and pick-up costs fall into an allowable category of expenses set out in section 171.1012(c), (d), or (f). We hold that they do not.
As we noted earlier, the costs allowed by section 171.1012 generally relate to the acquisition, production, or storage of goods, and whether a cost is eligible largely depends on when the cost was incurred: costs related to producing, obtaining, manufacturing, or storing goods are eligible, while costs incurred in selling or in the post-sale handling of the goods are not. Compare Tex. Tax Code § 171.1012(c), (d), (f), with
Under the unambiguous language used by the legislature in subsection (k-1), Sunstate and similar heavy construction equipment rental companies can include in their COGS deductions many of the costs they incur in obtaining and maintaining the heavy equipment that they rent out-inbound transportation, storage and inbound handling costs, depreciation, repairs, insurance, and the like. They may not include costs that a retailer or producer of heavy equipment would be explicitly barred from including in its COGS deduction.
Subsection 171.1012(i)
In its motion for summary judgment, Sunstate argued alternatively that its delivery and pick-up costs "constituted labor" on a construction project or other improvements to real property and could be deducted under subsection 171.1012(i). We hold that subsection (i) is not available to Sunstate.
*541As we set out earlier, subsection 171.1012(i) states that an "entity furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance ... of real property" is considered to be the owner of the labor or materials and "may include the costs, as allowed by this section, in the computation of cost of goods sold." Tex. Tax Code § 171.1012(i). The apparent intent of subsection (i) appears to have been to extend COGS to developers of land or contractors and subcontractors who work on real-property-improvement projects. See
However, even if we agreed that Sunstate, a company that fits clearly into subsection 171.1012(k-1), a provision tailored specifically for its line of business, could attempt to seek a COGS deduction under another provision, Sunstate could not turn to subsection (i) for relief.
Only an entity that furnishes labor or materials to a project for the improvement of real property may take a deduction under subsection (i) for its "costs, as allowed by this section." Tex. Tax Code § 171.1012(i). "The analytic framework for determining whether a particular 'labor cost' is includable as a cost of goods sold under subsection 171.1012(i), therefore, requires determining whether the particular activity is an essential and direct component of the 'project for the construction ... of real property.' " CGG Veritas ,
In Newpark Resources , the taxpayer was able to obtain a COGS deduction for labor furnished in hauling away used drilling mud and other waste products from oil well drilling sites. 422 S.W.3d at 48. That labor was in fact provided to the oil well projects, and without the removal of used drilling mud and other waste material brought up during the drilling process, a well cannot be completed. Id. at 57 ("There was testimony at trial that the waste material was an inescapable byproduct of drilling, that removal and disposal of this waste material was essential to continue drilling, and that without this disposal the drilling process would come to an immediate halt."). Similarly, in CGG Veritas , the taxpayer acquired and processed seismic data to aid in determining where to drill for oil and gas, and the trial court found that those services were "integral, essential, and direct" components of the drilling process.
In contrast, Sunstate showed that under its contracts with its customers, who were "generally subcontractors involved in construction work," it delivered its heavy construction and industrial equipment to and picked up the equipment from construction *542sites.
Remaining Arguments
Sunstate also contends that subsection 171.1012(e) only limits Sunstate's "additional costs" under subsection (d), not its "direct" costs under subsection (c). It asserts that subsection (e) applies only to limit the indirect costs listed in subsection (d), that it cannot limit a taxable entity's "unequivocal ability to include all direct costs as provided by § 171.1012(c)," and that the Comptroller has conducted an "inverted analysis of subsection (e) and (c)." We disagree. Subsection (c) does allow the deduction of direct costs, providing a non-exclusive list of possible eligible costs. Tex. Tax Code § 171.1012(c). Then, it allows for the deduction of certain other specific costs, incurred after the goods are produced or acquired. Id. § 171.1012(d). Subsection (e) does not "limit" or disallow a direct cost under subsection (c). Instead, it explains what, by statute, is considered a cost of goods, providing clarification for costs that might be questionable or arguable. See id. § 171.1012(e). Nothing in the Comptroller's analysis is inverted, nor does determining that Sunstate's delivery and pick-up costs are more like rehandling or distribution costs than like handling and inbound delivery costs somehow offend the structure of the statute.
Finally, Sunstate argues that if it is subject to the same COGS deductions as a retailer,
Conclusion
Sunstate's delivery and pick-up costs are not allowable under section 171.1012, and Sunstate may not seek to expand its available COGS options by claiming under subsection (i). We have overruled Sunstate's remaining arguments. We therefore reverse the trial court's ruling in Sunstate's favor and render judgment granting the Comptroller's motion for summary judgment.
Sunstate included the following in its asserted COGS deductions: delivery/pick-up drivers' wages, payroll taxes, and benefits; delivery vehicle depreciation, insurance, property taxes, fuel, oil, fluids, and lubricants; and laundry and uniforms for delivery/pick-up drivers and employees who worked on the rental equipment.
We will cite to the current version of statutes when intervening amendments do not affect our discussion.
"Goods" are defined as "real or tangible personal property sold in the ordinary course of business of a taxable entity," and "tangible personal property" as relevant to this case is defined as "personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner." Tex. Tax Code § 171.1012(a)(1), (3)(A)(i).
Subsection (c) also includes the cost of materials consumed in producing the goods; depreciation, depletion, and amortization associated with and necessary to the production of the goods; research and design activities directly related to the production of the goods; geophysical costs to locate mineral-producing property; taxes paid for materials or services that are direct production costs; the cost of producing or acquiring electricity sold; and "a contribution to a partnership in which the taxable entity owns an interest that is used to fund activities, the costs of which would otherwise be treated as cost of goods sold of the partnership, but only to the extent that those costs are related to goods distributed to the taxable entity as goods-in-kind in the ordinary course of production activities rather than being sold." Id. § 171.1012(c).
Subsection (d) also includes insurance for facilities or equipment directly used to produce the goods; insurance on the produced goods; deterioration, obsolescence, spoilage, and abandonment of the goods; pre-production direct costs for property held for future production, including storage and handling provided for by subsection (c); utilities directly used in producing the goods; quality control costs; and licensing or franchise costs. Id. § 171.1012(d).
Subsection (e) also excludes "selling costs, including employee expenses related to sales," advertising costs, idle facility expenses, bidding costs, interest, income taxes, strike expenses, officer compensation, and compensation paid to undocumented workers. Id. § 171.1012(e).
Sunstate quotes from a brief filed by the Comptroller in In re Nestle USA stating that the legislature intended to allow companies with different business models to deduct "primary costs" on par with sellers of similar goods. See Post-Submission Brief for Real Party in Interest at 10-11, In re Nestle USA, Inc. ,
Nor does this statement by the supreme court in In re Nestle USA support Sunstate's position:
the Cost of Goods Sold, includes "all direct costs of acquiring or producing goods", some indirect costs like insurance, utilities, and quality control, and up to 4% of other "indirect or administrative overhead costs". Public lending institutions and lessors of motor vehicles, heavy construction equipment, and rolling stock may include certain other expenses in their Cost of Goods Sold.
Although it does not affect our analysis, we note that Combs v. Health Care Services Corp. involved a tax exemption.
Although Sunstate's pick-up services do not translate to a seller of heavy equipment, its delivery services do, and it does not explain why, despite section 171.1012's requirement that a rental company's COGS be "otherwise allowed," it should be able to deduct its delivery costs when section 171.1012(e) explicitly excludes such costs.
We disagree with Sunstate that its pick-up costs were not "rehandling costs" but "could be characterized as 'inbound transportation costs' " or as "deductible 'post-[rental or leasing] direct costs allocable to the [equipment].' " The latter argument is disposed of by our explanation that the acquisition of the equipment, not the "rental or leasing" of the equipment, is the proper focus of the statute, and the former argument stretches ordinary language too far.
Sunstate does not argue that it provided materials, only that its delivery and pick-up services were labor under subsection (i).
The default franchise tax rate is 0.75 percent of an entity's taxable margin, but an entity "primarily engaged in retail or wholesale trade" is subject to a lower rate. Tex. Tax Code § 171.002(a), (b).