IN THE SUPREME COURT OF TEXAS

444444444444

NO. 17-0444

444444444444

SUNSTATE EQUIPMENT CO., LLC, PETITIONER,

v.

GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS;

AND KEN PAXTON, ATTORNEY GENERAL OF THE STATE OF TEXAS, RESPONDENTS

4444444444444444444444444444444444444444444444444444

ON PETITION FOR REVIEW FROM THE

COURT OF APPEALS FOR THE THIRD DISTRICT OF TEXAS

4444444444444444444444444444444444444444444444444444

Argued October 9, 2019

JUSTICE GREEN delivered the opinion of the Court.

This case requires us to determine whether a heavy construction equipment rental company

may subtract certain delivery and pick-up costs as cost of goods sold (COGS) under section

171.1012 of the Texas Tax Code. Sunstate Equipment first argues that it is entitled to subtract costs

under section 171.1012(k-1), and that its costs fall within those specified by section 171.1012(c) and

(d). See TEX. TAX CODE § 171.1012(c), (d), (k-1). Sunstate reasons that the Texas franchise-tax

scheme is based on business models and that we should therefore consider its unique business costs

when determining its COGS. Alternatively, Sunstate argues that section 171.1012(i) independently

authorizes these cost subtractions because they are part of “the costs” associated with “furnishing
labor or materials to a project for the construction . . . of real property.” Id. § 171.1012(i). We

disagree and affirm the judgment of the court of appeals.

I. Background

Sunstate is a Delaware limited liability company with headquarters in Phoenix, Arizona. It

rents out heavy construction and industrial equipment to customers throughout Texas. The Texas

Comptroller audited Sunstate for the 2008 and 2009 taxable years, assessing deficiencies, penalties,

and interest totaling $140,495.88. Sunstate paid the amount under protest and brought suit for a

refund.

Each party filed a motion for summary judgment. The district court denied the Comptroller’s

motion and granted Sunstate’s motion, ordering a full refund of the amount paid, including interest. 

The court of appeals reversed and rendered judgment in favor of the Comptroller. 578 S.W.3d 533,

543 (Tex. App.—Austin 2017, pet. granted) (mem. op.). It concluded that Sunstate’s interpretation

of subsection (k-1) would invert section 171.1012 to make it about a company’s revenue rather than

its goods. See id. at 538. Instead, the court of appeals limited subsections 171.1012(c) through (f)

to “costs a business incurs to obtain the goods it will sell, whether through production or

acquisition” and not “costs it incurs in selling or distributing the goods.” Id. (citing TEX.TAX CODE

§ 171.1012(c)–(f)). The court of appeals believed this position “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.” Id. at 539. The court recognized

that holding otherwise would provide companies like Sunstate with a broader class of subtractions

than the statute created without a statutory indication that that was the Legislature’s intent. See id.

2
The court of appeals agreed with the Comptroller that Sunstate’s costs are “more akin to those

excluded costs than to any of the allowable costs included in the statute.” Id. at 540. 

The court of appeals disagreed with Sunstate that subsection (i) provided a separate statutory

basis to subtract the costs. Id. Subsection (i) allows an “entity furnishing labor or materials to a

project for the construction, improvement, remodeling, repair, or industrial maintenance . . . of real

property” to be considered an owner of that labor and materials and “include the costs, as allowed

by . . . section [171.1012], in the computation of cost of goods sold.” TEX.TAX CODE § 171.1012(i). 

The court of appeals first reasoned that “Sunstate may not opt to take a COGS deduction under

subsection (i), which might arguably apply, rather than subsection (k-1), which definitely and

specifically applies.” 578 S.W.3d at 541 (citing Lexington Ins. Co. v. Strayhorn, 209 S.W.3d 83,

86 (Tex. 2006)). Alternatively, it concluded that the equipment Sunstate furnished is not “an

essential and direct component of the ‘project for the construction . . . of real property.’” Id.

(citations omitted). While Sunstate’s customers might be able to benefit from a subsection (i)

subtraction, the court of appeals held, Sunstate’s labor cannot be “considered a direct component

of the improvement projects,” nor can its services “be considered an essential component of the

projects.” Id. at 542 (citations omitted). The court concluded that Sunstate’s labor is not provided

to the project, but instead helps transport and deliver equipment that its customers might use for a

project. See id. at 541–42. According to the court of appeals, it “would stretch subsection (i) too

far” to characterize the delivery and pick up of Sunstate’s rental equipment as “labor furnish[ed]”

within the meaning of subsection (i). Id. at 542 (alterations in original).

3
II. Standard of Review

Statutory construction is a question of law reviewed de novo. First Am. Title Ins. Co. v.

Combs, 258 S.W.3d 627, 631 (Tex. 2008). When determining the meaning of a statute, our purpose

is to effectuate the Legislature’s intent by “giv[ing] effect to every word, clause, and sentence.” Id.

(citation omitted). Therefore, to distill the meaning of a statute, we start with its text and the plain

meaning of its words construed within the statute as a whole. See Combs v. Roark Amusement &

Vending, L.P., 422 S.W.3d 632, 635 (Tex. 2013) (citation omitted). Unless the statute provides a

separate definition, we presume that the Legislature meant to use the ordinary meaning of a word,

with each term “interpreted consistently in every part of [the] act.” Tex. Dep’t of Transp. v.

Needham, 82 S.W.3d 314, 318 (Tex. 2002) (citation omitted); see City of Rockwall v. Hughes, 246

S.W.3d 621, 625–26 (Tex. 2008). Only if the text reveals the statute is ambiguous, or applying its

plain meaning would produce an absurd result, will we turn to extrinsic sources. See Tex. Health

Presbyterian Hosp. of Denton v. D.A., 569 S.W.3d 126, 135–136 (Tex. 2018); Entergy Gulf States,

Inc. v. Summers, 282 S.W.3d 433, 437 (Tex. 2009).

The Comptroller asserts that we should strictly construe section 171.1012 against the

taxpayer because COGS is a deduction tantamount to an exemption. This Court has previously held

that tax exemptions must be construed strictly because “they are the antithesis of equality and

uniformity and because they place a greater burden on other taxpaying businesses and individuals.” 

Bullock v. Nat’l Bancshares Corp., 584 S.W.2d 268, 272 (Tex. 1979) (citation omitted). But

Chapter 171 makes clear that the COGS subtraction is not an exemption. The franchise tax is levied

on a taxable entity’s “taxable margin.” TEX. TAX CODE § 171.002. It is not a tax on revenue. The

4
COGS subtraction is part of the calculation of taxable margin, for taxable entities that choose that

method. Id. § 171.101(a). Subtracting COGS from total revenue pursuant to section

171.101(a)(1)(B) does not “exempt” or “deduct” otherwise taxable amounts from taxation. Instead,

the subtraction is how the amount subject to tax is determined in the first place.

III. Stipulated Facts

The parties stipulated facts as to activities that occurred between June 1, 2008 and March 31,

2011. As the court of appeals did, we list the stipulated facts below. See 578 S.W.3d at 537.

• Sunstate rented out 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. In about eighty

percent of its contracts, Sunstate typically delivered its rental equipment to the construction

site and picked it up at the end of the rental term. 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

deliveries and pick ups, and maintained facilities to store the delivery vehicles, incurring

costs for labor provided by the delivery employees, vehicles’ depreciation, property tax 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 rental

revenue for those contracts in which it provided delivery and pick up, 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 costs 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. 

5
• Sunstate exhausted its administrative remedies and paid the alleged deficiencies, penalties,

and interest under protest.

IV. Applicable Law

Texas’s “franchise tax is imposed on each taxable entity that does business in this state or

that is chartered or organized in this state.” TEX. TAX CODE § 171.001(a). Only entities listed in

section 171.0002 of the Texas Tax Code, when not exempt, are liable for franchise tax. Id.

§§ 171.0002, .051–.088. The Tax Code specifies how a taxable entity’s taxable margin—to which

the statutorily set franchise tax rate applies—is calculated. Id. § 171.101. That calculation begins

with total revenue, which may then be adjusted by various methods, one of which allows a taxable

entity to, at its election, subtract COGS in calculating taxable margin. Id. §§ 171.101, .1011. 

Specifically, under the statute in effect for purposes of this case, the taxable margin could be

calculated as the lesser of (1) “70 percent of the taxable entity’s total revenue,” or (2) “the taxable

entity’s total revenue” minus, at the entity’s election, “the cost of goods sold, as determined under

section 171.1012” or “compensation, as determined under section 171.1013.”1 Id.

§ 171.101(a)(1)(A)(i), (a)(1)(B)(ii)(a). Section 171.1012 addresses what costs can and cannot be

1

 The Legislature amended the statute in 2013 to require that a company generate at least a million dollars in

total revenue for the franchise tax to apply. See Act of May 27, 2013, 83d Leg., R.S., ch. 1232, § 6, 2013 Tex. Gen.

Laws 3104, 3106 (codified at TEX. TAX CODE § 171.101(a)(1)(A)(ii)). That amendment does not apply to this case. 

Under the statute in effect for purposes of this case, a taxable entity is liable for franchise tax regardless of whether its

revenue was above or below the million-dollar threshold. See Act of May 2, 2006, 79th Leg., 3d.,C.S., ch. 1, § 4, 2006

Tex. Gen. Laws 1, 8 (amended 2013).

6
subtracted from taxable revenue as COGS, as well as which taxable entities are entitled to subtract

COGS in calculating taxable margin.2 Id. § 171.1012.

Section 171.1012, which establishes which entities may subtract what costs, defines “goods”

as “real or tangible personal property sold in the ordinary course of business of a taxable entity.” 

Id. § 171.1012(a)(1). Tangible personal property includes “personal property that can be seen,

weighed, measured, felt, or touched or that is perceptible to the senses in any other manner.” Id.

§ 171.1012(a)(3)(A)(i). It excludes “services,” a term not defined in the statute. Id.

§ 171.1012(a)(3)(B)(ii). A taxable entity may subtract “all direct costs of acquiring or producing

the goods.” Id. § 171.1012(c). A taxable entity may also subtract certain indirect costs that are “in

relation to the taxable entity’s goods.” Id. § 171.1012(d). In addition, certain “indirect or

administrative overhead costs . . . allocable to the acquisition or production of goods” may be

subtracted. Id. § 171.1012(f). But a taxable entity may not subtract certain costs,

“includ[ing] . . . distribution costs . . . [and] rehandling costs.” Id. § 171.1012(e)(3), (6). The

Legislature included subsections (k-1) and (i)—the two subsections at issue here—for companies

that could not otherwise subtract COGS. Subsection (k-1) provides in relevant part:

Notwithstanding any other provision of this section, the following taxable entities

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 of the entity:

2

 There is no dispute that the version of section 171.1012 in effect in 2008 applies to this case. See Act of May

2, 2006, 79th Leg., 3d C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 8 (amended 2013). The Legislature has since added

additional entities that may subtract COGS. See Act of May 27, 2013, 83d Leg., R.S., ch. 1232, §§ 9–10, 2013 Tex. Gen.

Laws 3107, 3107–08 (codified at TEX. TAX CODE § 171.1012(k-2), (k-3), (t)). And it has removed “installation” as a

form of “production.” Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 13 amended by Act

of May 19, 2017, 85th Leg., R.S., ch. 377, § 1, 2017 Tex. Gen. Laws 1038, 1038 (current version at TEX. TAX CODE

§ 171.1012(a)(2)). Those changes are not as issue here.

7
 . . .

(2) a heavy construction equipment rental or leasing company.

Id. § 171.1012(k-1)(2). Subsection (i) provides in relevant part:

A taxable entity may make a subtraction under this section in relation to the cost of

goods sold only if that entity owns the goods. The determination of whether a

taxable entity is an owner is based on all of the facts and circumstances, including

the various benefits and burdens of ownership vested with the taxable entity. A

taxable entity furnishing labor or materials to a project for the construction,

improvement, remodeling, repair, or industrial maintenance (as the term

“maintenance” is defined in 34 [TEX. ADMIN.CODE] Section 3.357) 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.

Id. § 171.1012(i). In this case, we must determine whether either of these provisions authorizes

Sunstate to subtract its delivery and pick-up costs as COGS.

V. Analysis

A. Subsection (k-1)

We begin by considering subsection (k-1), as Sunstate focused primarily on that provision

in its motion for summary judgment and on appeal, and it was the primary focus of the court of

appeals’ decision. See 578 S.W.3d at 537–40. Sunstate argues that subsection (k-1) allows

companies that rent or lease out heavy construction equipment to subtract the costs associated with

their business, including costs to deliver equipment to and pick equipment up from job sites. 

Subsection (k-1) allows certain entities to subtract costs “in relation to tangible personal

property that the entity rents or leases in the ordinary course of business.” Id. § 171.1012(k-1). “[A]

heavy construction equipment rental or leasing company” is one of three types of businesses entitled

to the subtraction under this subsection. Id. § 171.1012(k-1)(2). Here, the parties stipulated that

8
Sunstate rents out heavy construction and industrial equipment and qualified as a heavy construction

equipment rental or leasing company under section 171.1012(k-1)(2). There is no question that

Sunstate is the type of entity that qualifies for a COGS subtraction under subsection (k-1). 

We next turn to what costs, if any, Sunstate is entitled to subtract as COGS under subsection

(k-1). Sunstate categorizes the labor, fuel, depreciation, maintenance, and property tax costs related

to its delivery and pick-up of equipment as direct costs that can be subtracted as COGS under section

171.1012(c). See id. § 171.1012(c)(1), (3), (6), (8), (11). It categorizes its insurance costs for

delivery vehicles and the employees who operate those vehicles as additional costs which are “in

relation to” the heavy construction equipment Sunstate rents out and can thus be subtracted as COGS

under section 171.1012(d). See id. § 171.1012(d)(6). The Comptroller recategorized the costs at

issue as administrative or overhead costs that could be subtracted under section 171.1012(f), subject

to statutory limitations. See id. § 171.1012(f). The court of appeals concluded that the costs at issue

could not properly be included in the COGS subtraction and were more akin to costs excluded under

section 171.1012(e). 578 S.W.3d at 540; see TEX. TAX CODE § 171.1012(e).

To determine what costs Sunstate could subtract as COGS, we begin with the statutory

definitions. The statute defines “goods” to mean “real or tangible personal property sold in the

ordinary course of business of a taxable entity.” TEX. TAX CODE § 171.1012(a)(1). There is no

dispute that in this case, the “tangible personal property” is the heavy construction and industrial

equipment that Sunstate rents to its customers. Generally, a taxable entity must sell property (real

or personal) that it owns to be entitled to a COGS subtraction. Id. § 171.1012(a)(1), (i). However,

with subsection (k-1), the Legislature provided that certain taxable entities that do not sell their

9
goods but only rent or lease them nevertheless qualify for a COGS subtraction, just as a retailer

would. Id. § 171.1012(k-1). Under section 171.1012(k-1), Sunstate’s “goods” are the heavy

construction and industrial equipment that it rents in the ordinary course of business.3

B. COGS

Having determined the meaning of “goods sold” in this context,4

 we next turn to the question

of which, if any, costs Sunstate is entitled to subtract in determining its taxable margin. We begin

with Sunstate’s argument, relying on courts of appeals’ opinions, that subsection (k-1)’s use of the

term “in relation to” entitles it to subtract any costs incurred that have some reasonable nexus to the

goods. See Hegar v. Gulf Copper & Mfg. Corp., 535 S.W.3d 1, 12 (Tex. App.—Austin 2017, pet.

granted); Titan Transp. LP v. Combs, 433 S.W.3d 625, 637 (Tex. App.—Austin 2014, pet. denied)). 

A reasonable nexus exists here, according to Sunstate, because the costs at issue were an “integral

part” of renting out the heavy equipment, furthered the purpose of providing the equipment to the

customers’ job sites, and the equipment typically could not have been rented without Sunstate

paying those costs. 

Subsection (k-1) allows a taxable entity qualifying for a COGS subtraction to “subtract as

cost of goods sold the costs otherwise allowable by this section in relation to tangible personal

property that the entity rents or leases in the ordinary course of business of the entity.” TEX. TAX

3

 Sunstate’s “goods” do not include any services, however, as the statute excludes services from the definition

of “tangible personal property.” See TEX. TAX CODE § 171.1012(a)(3)(B)(ii).

4

 In light of subsection (k-1)’s provision allowing rental and leasing companies a COGS subtraction despite not

selling property in the ordinary course of business, we note that the term “cost of goods sold” is somewhat of a misnomer

in this specific context. Nevertheless, we use that term and “COGS” to refer to the costs that can be subtracted pursuant

to section 171.1012, as that is terminology used in the statute.

10
CODE § 171.1012(k-1). Thus, subsection (k-1) specifically limits the COGS subtraction to the

COGS determination under other parts of section 171.1012. Id. While subsection (k-1) does use

the term “in relation to,” there is nothing in that subsection that expands or alters the meaning of

COGS or the types of costs included and excluded in COGS, as set out in section 171.1012(a)

through (f). To the contrary, the statute very clearly provides that a heavy construction equipment

rental or leasing company can subtract as COGS the costs that section 171.1012 allows as to

equipment that is rented or leased out in the ordinary course of business.

Sunstate further points to a court of appeals’ opinion interpreting the phrase “in connection

with” from Texas Tax Code section 171.1011(g)(3) to assert that “in relation to” is a “phrase of

intentional breadth” within franchise tax cases. See Titan Transp. LP, 433 S.W.3d at 637. Of

course, we presume that the Legislature chose its words with care and used every phrase with a

purpose, and where possible we give effect to every word and phrase so no part of a statute will be

rendered meaningless. TEX. GOV’T CODE § 311.021(2); see City of Dall. v. TCI W. End, Inc., 463

S.W.3d 53, 55–56 (Tex. 2015) (per curiam); First Am. Title Ins. Co., 258 S.W.3d at 631. Without

addressing the distinction between “in relation to” in section 171.1012 and “in connection with” in

section 171.1011, as we need not do so in this case, we read subsection (k-1) in the context of

section 171.1012, as the plain language of (k-1) instructs us to do. See TEX. TAX CODE

§ 171.1012(k-1). While it may be possible to read “in relation to” expansively, so that an entity

could subtract a cost with even the most tenuous connection to the equipment, we decline to do so

here. See Cadena Comercial USA Corp. v. Tex. Alcoholic Beverage Comm’n, 518 S.W.3d 318, 327

(Tex. 2017) (citation omitted) (“If an undefined word used in a statute has multiple and broad

11
definitions, we presume—unless there is clear statutory language to the contrary—that the

Legislature intended it to have equally broad applicability.”). “[W]e have warned against

expansively interpreting broad language when it is immediately preceded by narrow and specific

terms.” R.R. Comm’n of Tex. v. Tex. Citizens for a Safe Future & Clean Water, 336 S.W.3d 619,

629 (Tex. 2011). And here the Legislature narrowed the eligible subtractions to “the costs otherwise

allowed by this section,” the narrowing phrase immediately preceding “in relation to.” TEX. TAX

CODE § 171.1012(k-1). 

Reading “in relation to” in its statutory context, we note that section 171.1012(d) allows a

taxable entity to subtract as COGS indirect costs that are “in relation to the taxable entity’s goods.” 

Id. § 171.1012(d). We read “in relation to” in subsection (k-1) to refer to the same sorts of indirect

costs covered by subsection (d), so that an entity such as Sunstate can subtract as COGS the indirect

costs specified in subsection (d) which relate to its rental of heavy construction and industrial

equipment. See id.; Cadena Commercial, 518 S.W.3d at 328 (construing the term “interest”

narrowly because of its surrounding context). However, we note that direct costs of acquiring that

equipment would also be “in relation to” the equipment. TEX. TAX CODE § 171.1012(c). In sum,

we reject Sunstate’s interpretation of subsection (k-1)’s use of “in relation to” and read the phrase

in its statutory context to mean that a heavy construction equipment rental or leasing company may

subtract as COGS the direct and indirect costs allowable under section 171.1012, as those specific

cost provisions relate to the renting and leasing out of equipment. In other words, nothing in

subsection (k-1) specifies what types of costs a taxable entity may subtract as COGS under the

12
subsection, as the statute specifies that the costs are those “otherwise allowed” by section 171. 1012;

rather, subsection (k-1) specifies only what types of entities are entitled to the COGS subtraction. 

The beginning of subsection (k-1) is consistent with our reading. It provides that the COGS

subtraction is available to qualifying entities “[n]otwithstanding any other provision.” Id.

§ 171.1012(k-1). This language creates an exception to the statute whereby heavy construction

equipment rental or leasing companies can subtract COGS despite not actually selling their

equipment. Id. § 171.1012(c), (k-1). In Molinet v. Kimbrell, 356 S.W.3d 407 (Tex. 2011), we

interpreted a similar phrase in a different statute. There, a claimant argued that he properly joined

two doctors in a health care liability claim after they were designated responsible third parties. Id.

at 411. Texas Civil Practice and Remedies Code section 33.004(e) allowed a claimant to join

designated responsible third parties outside a statute of limitations period if they were joined within

60 days of being designated. See id. (discussing TEX. CIV. PRAC. & REM. CODE § 33.004(c)). 

Section 74.251(a) of the Texas Civil Practice and Remedies Code contained a statute of limitations

provision that existed “notwithstanding any other law,” barring claims commenced against a

defendant more than two years after the occurrence of the allegedly negligent act. Id. (discussing

TEX. CIV. PRAC. & REM. CODE § 74.251(a)). The claimant added the doctors more than two years

after their alleged torts. See id. at 409. In construing the statute, we held that section 74.251(a)’s

specific pronouncement controlled over section 33.004(e) because section 74.251(a) existed

“notwithstanding any other law” and the two provisions were irreconcilable. See id. at 412–14. 

Thus, we recognized that such a “notwithstanding” provision indicates that the provision controls

in the event of an irreconcilable conflict with another provision.

13
Subsection 171.1012(k-1) is irreconcilable with the remainder of section 171.1012 to the

extent that (k-1) permits a taxable entity to subtract COGS despite not selling goods in the ordinary

course of business—a core requirement evident in the statutory definition of “goods” and in the

statute’s list of costs that can be included, and not excluded, in the COGS determination. See TEX.

TAX CODE § 171.1012(a)(1), (c)–(f), (k-1). It is not irreconcilable as to the specific costs that such

an entity can subtract because subsection (k-1) specifically provides that a heavy construction

equipment rental or leasing company can subtract as COGS those costs otherwise allowed by other

provisions of section 171.1012. The Legislature created no new list of costs that equipment rental

or leasing companies may subtract as COGS, nor did the Legislature provide in any way that such

companies’ COGS subtraction may differ from the costs explicitly included and excluded under the

other provisions of the statute. Therefore, we conclude that an entity subject to (k-1), such as

Sunstate, may subtract as COGS only those costs otherwise allowed by other provisions of section

171.1012.

Sunstate argues that this position is inconsistent with In re Nestle USA Inc., 387 S.W.3d 610

(Tex. 2012), because the franchise tax calculation must account for differences in a company’s

business model. Sunstate asserts that because the franchise tax is a tax on the “privilege of doing

business” in the state, a company’s unique costs reflect the value of that privilege. Id. at 621. The

heart of that privilege is the “opportunity to realize gross income.” Id. at 622 (citations omitted). 

For Sunstate, this would mean allowing it to subtract any cost associated with how it realizes income

through renting out its equipment, rather than restricting the costs it can subtract to those of a retailer

selling the same equipment.

14
This approach would undermine the discretion we have recognized “the Legislature must

have . . . in structuring tax laws,” as well as basic principles of interpreting tax statutes. Id. at 623;

see also Combs v. Health Care Servs. Corp., 401 S.W.3d 623, 627 n.8 (Tex. 2013). Our opinion in

In re Nestle addressed how to assess the constitutionality of a tax statute. See generally 387 S.W.3d

621–23. It provided parameters for protecting more than “a prohibition against irrational [tax]

legislation” and described that classification should “affect the value of the privilege” of doing

business in the state. Id. at 622. The Legislature, in its discretion, has determined that the best way

to calculate the taxable value of rental or leasing companies is similar to calculating the taxable

value for retailers of the same equipment—by looking at certain tasks that create costs rather than

at all costs involved in a company’s business.5 Taking Sunstate’s proposed approach would require

us to allow costs to be subtracted as COGS that the statute does not permit, essentially ignoring the

Legislature’s specific lists of costs properly included as COGS. Previously, we have been clear that

we will not use “the economic realities of the transactions in issue” to impose new requirements for

an exemption. See Health Care Servs. Corp., 401 S.W.3d at 627 n.8; Roark Amusement & Vending,

L.P., 422 S.W.3d at 637 n.14. While the COGS subtraction is not an exemption, we likewise will

not use an industry’s unique business model to impose new COGS requirements that stand to change

computation of taxable margin and franchise tax liability, when such a provision “simply is not

found in the language of the statut[e].” See Health Care Servs. Corp., 401 S.W.3d at 627 n.8.

5

 Sunstate suggests that In re Nestle created a new class of costs unique to its industry. In In re Nestle, we

stated: “[H]eavy construction equipment [rental or leasing companies] . . . may include certain other expenses in their

Cost of Goods Sold.” 387 S.W.3d at 615. That language recognizes that there may be expenses unique to the rental and

leasing industry that falls within one of section 171.1012’s COGS categories, which retailers might not incur. It was

not meant to create an additional class of costs not included as COGS under the statute, and it most certainly was not

meant to undermine the statutory COGS exclusions.

15
Because the subtraction authorized under subsection (k-1) is limited to the COGS

determination under section 171.1012, we must consider subsections 171.1012(c) through (f) to

determine whether Sunstate’s costs can be included in COGS under those provisions. Subsection

(c) allows a taxable entity to subtract “all direct costs of acquiring or producing the goods,” and it

provides a list of costs included in that category. TEX.TAX CODE § 171.1012(c). While “acquiring”

is not defined in the statute, “production” was defined as including “construction, installation,

manufacture, development, mining, extraction, improvement, creation, raising, or growth.” Act

of May 2, 2006, 79th Leg., 3d C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 13 (amended 2017). 

Subsection (d) allows a taxable entity to subtract indirect costs that need not be for acquiring or

producing goods but must be “in relation to the taxable entity’s goods,” and it provides a list of costs

in that category. TEX. TAX CODE § 171.1012(d). Subsection (f) provides that a taxable entity can

also subtract “indirect or administrative costs . . . allocable to the acquisition or production of

goods,” and it gives examples, but the subtraction under subsection (f) is specifically limited in

amount. Id. § 171.1012(f). Further, subsection (e) lists certain costs that could arguably be

considered “in relation to the taxable entity’s goods,” but are nevertheless excluded. Id.

§ 171.1012(e).

In analyzing the costs at issue and the statutory provisions for included and excluded costs,

we remain mindful of lines drawn by the Legislature. The COGS scheme in section 171.1012

distinguishes between costs to acquire or produce goods that will ultimately be sold—included in

COGS—from costs incurred in the distribution or selling of goods—excluded from COGS. 

Compare id. § 171.1012(c) (“The cost of goods sold includes all direct costs of acquiring or

16
producing the goods, including [those listed] . . . .”), with id. § 171.1012(e)(2), (3) (“The costs of

goods sold does not include . . . selling costs . . . [or] distribution costs . . . .”). More specifically,

the statute distinguishes between inbound transportation costs—included in COGS—from outbound

transportation costs—excluded. Compare id. § 171.1012(c)(4) (“The cost of goods sold includes

all direct costs of acquiring or producing the goods, including . . . inbound transportation

costs . . . .”), with id. § 171.1012(e)(3) (“The cost of goods sold does not include . . . outbound

transportation costs . . . .”). Similarly, handling costs are included in COGS, while rehandling costs

are excluded.6

 Compare id. § 171.1012(c)(4) (“The cost of goods sold includes all direct costs of

acquiring or producing the goods, including . . . inbound transportation costs . . . .”), with id.

§ 171.1012(e)(6) (“The cost of goods sold does not include . . . rehandling costs . . . .”). And the

definition of “goods” itself, as we have mentioned, distinguishes between the property itself—used

in determining COGS—from services—excluded as a form of property. Compare id.

§ 171.1012(a)(1) (“‘Goods’ means real or tangible personal property sold in the ordinary course of

business of a taxable entity.”), with id. § 171.1012(a)(3)(b)(ii) (“‘Tangible personal property’ does

not include . . . services.”).

6

 We note that section 171.1012(c) includes in COGS “the cost of renting or leasing equipment, facilities, or

real property directly used for the production of the goods,” and section 171.1012(e) excludes “the cost of renting or

leasing equipment, facilities, or real property that is not used for the production of the goods.” Compare TEX.TAX CODE

§ 171.1012(c)(7), with id. § 171.1012(e)(1). The parties have not argued that these provisions apply in this case.

17
1. Direct Costs

Sunstate contends that most of the costs at issue (i.e., costs for labor, fuel, depreciation,

maintenance, and property taxes associated with vehicles and labor for delivery and pick up of

equipment) are properly categorized as direct costs that can be subtracted as COGS pursuant to

section 171.1012(c). See id. § 171.1012(c)(1), (3), (6), (8), (11). To be included in COGS under

subsection (c), the costs must be “direct costs of acquiring or producing the goods.” Id.

§ 171.1012(c). 

Sunstate does not contend that any of the costs at issue come from the initial acquisition of

its heavy construction equipment. In the stipulated facts, Sunstate agrees that these costs arise out

of contracts to deliver equipment to and pick equipment up from the customers’ construction sites. 

We must determine if Sunstate’s particular costs relating to delivery and pick up of rented equipment

are “direct costs of acquiring or producing the goods.” See id.

The Legislature did not define the word “acquiring” for purposes of calculating COGS. 

When the Legislature leaves a word undefined, we will apply the “common, ordinary meaning

unless a contrary meaning is apparent from the statute’s language.” Tex. State Bd. of Exam’rs of

Marriage & Family Therapists v. Tex. Med. Ass’n, 511 S.W.3d 28, 34 (Tex. 2017) (footnote

omitted) (citation omitted); see Entergy Gulf States, Inc., 282 S.W.3d at 437–38. “[W]e consult

dictionaries to discern the natural meaning of a common-usage term not defined by contract, statute,

or regulation.” Epps v. Fowler, 351 S.W.3d 862, 866 (Tex. 2011) (citations omitted). The

dictionary defines “acquire” to mean “to come into possession, control, or power of disposal.” 

Acquire, WEBSTER’S NEW INT’L DICTIONARY (2002). While this definition, by itself, could be

18
understood broadly to mean that one could acquire the same thing over and over, we must read the

term in its statutory context. TEX. GOV’T CODE § 311.011(a) (“Words and phrases shall be read in

context and construed according to the rules of grammar and common usage.”); see TGS-NOPEC

Geophysical Co. v. Combs, 340 S.W.3d 432, 441 (Tex. 2011) (looking to the “statute in its entirety”

to interpret a term with various meanings). Here, we must consider the meaning of “acquire” in the

context of section 171.1012, including subsection 171.1012(e)’s exclusions. In particular,

subsection 171.1012(e)(6) excludes rehandling costs. TEX. TAX CODE § 171.1012(e)(6). While

“rehandling” is not defined, it undoubtedly means “handling again.” Rehandle, WEBSTER’S NEW

INT’L DICTIONARY (2002) (“To handle again.”); see TCI W. End, Inc., 463 S.W.3d at 55–56 (citation

omitted) (“We must avoid adopting an interpretation that ‘renders any part of the statute

meaningless.’”). By specifically excluding costs associated with handling goods again (and again,

in the case of rental goods), the Legislature removed the possibility that an entity could subtract

costs for acquiring the same goods repeatedly. Thus, the Legislature narrowed the potentially broad

definition of “acquire” to refer to direct costs associated with the initial receipt of goods that will

ultimately be sold. When read in conjunction with subsection (k-1), “acquire” then refers to the

initial receipt of heavy construction or industrial equipment that will ultimately be rented or leased

out. Because Sunstate does not derive the costs at issue from the initial acquisition of its equipment,

we hold that the costs cannot be subtracted as direct costs for acquisition of goods under section

171.1012(c).

If the costs at issue here can be subtracted as COGS, they must be direct costs of “producing”

goods under section 171.1012(c), or costs that can be subtracted under subsection (d) or (f). The

19
Legislature defined “production” to “include[] construction, installation, manufacture, development,

mining, extraction, improvement, creation, raising, or growth.” Act of May 2, 2006, 79th Leg., 3d

C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 13 (amended 2017). Sunstate seems to suggest that its costs

associated with delivery and pick up of equipment are for “production” because they are essential

to construction, improvement, and development of real property, noting that real property can be

considered “goods” under the statute. See TEX. TAX CODE § 171.1012(a)(1). But this erroneously

combines the statutory definitions. To be included as COGS that can be subtracted under section

171.1012(c), Sunstate’s costs must be directly for the “construction, installation, manufacturer,

development, . . . improvement, [or] creation” of “the goods,” which we have explained is the heavy

construction and industrial equipment that Sunstate rents to customers. Id. Notably absent is the

term “delivery” as a form of production.7

 Given that section 171.1012(e) excludes “distribution

costs, including outbound transportation costs,” as well as “rehandling costs” from COGS, id.

§ 171.1012(e)(3), (6), we must presume that the Legislature’s omission of “delivery” from the

definition of “production” is intentional and purposeful. See Silguero v. CSL Plasma, Inc., 579

7

 In the 2017 amendment that removed the term “installation” from the definitions of “production,” the

Legislature also changed the word “includes” to “means.” Act of May 19, 2017, 85th Leg., R.S., ch. 377, § 1, 2017 Tex.

Gen. Laws 1038, 1038 (current version at TEX.TAX CODE § 171.1012(a)(2)). It added that the change should not imply

that the prior version of section 171.1012 have a meaning “inconsistent with Section 171.1012, Tax Code, as amended

by this Act.” Id. § 2, 2017 Tex. Gen. Laws 1038, 1038. We do not read the change to indicate that delivery could have

been a form of production with or without the statutory amendment. If anything, the change only reinforces our

conclusion that “production” in section 171.1012 has a specific, understood meaning that does not include delivery of

equipment. In some contexts, “produce” is understood to include deliver. See, e.g., TEX.R.CIV. P. 192.3(b). (“A party

may obtain discovery of the existence, description, nature, custody, condition, location, and contents of documents and

tangible things . . . that constitute or contain matters relevant to the subject matter of the action. A person is required

to produce a document or tangible thing that is within the person’s possession, custody, or control.” (emphasis added)). 

However, when the Legislature specifically defined “production” in the statute here, we must interpret its omission of

“deliver” as purposeful, especially given the context of costs included and excluded from COGS. See Lippincott v.

Whisenhunt, 462 S.W.3d 507, 509 (Tex. 2015) (citation omitted) (“We presume the Legislature included each word in

the statute for a purpose and that words not included were purposefully omitted.”).

20
S.W.3d 53, 59 (Tex. 2019) (citations omitted) (“[We] presum[e] that the Legislature intended for

each of the statute’s words to have a purpose and that the Legislature purposefully omitted words

it did not include.”). Reading the definitions and statutory provisions together, it seems the

Legislature contemplated COGS subtractions for both the costs of acquiring goods ready to sell, as

well as costs contributing directly to making goods sellable, while excluding costs associated with

transporting goods for sale or goods sold (or, in the context of rental companies, goods rented out). 

See, e.g., TEX. TAX CODE § 171.1012(c)(2) (including in COGS “cost of materials that are an

integral part of specific property produced”); id. § 171.1012(c)(3) (including in COGS “cost of

materials that are consumed in the ordinary course of performing production activities”). Allowing

heavy construction equipment rental or leasing companies to subtract delivery-related costs that

contribute to making another entity’s goods sellable would go beyond the plain language of the

statute.8

Sunstate challenges the comparison of its costs to “distribution costs” or “rehandling costs”

and asserts that the court of appeals weaponized section 171.1012(e) in allowing such

classifications. Id. § 171.1012(e)(3), (6). However, the text of subsection (k-1) authorizes COGS

to be subtracted as “allowed by this section.” See id. § 171.1012(k-1). We decline to interpret

subsection (k-1) in a way that would encompass the included costs under subsections 171.1012(c)

and (d) yet ignore the exclusions under subsection (e). See Hernandez v. Ebrom, 289 S.W.3d 316,

8

 Sunstate seems to take the position that it could not rent out its equipment if it did not offer delivery and pick

up, and that those costs should be included in COGS because they are essential and integral to its business. While we

do not doubt that offering delivery and pick up aids Sunstate in renting out its equipment, we note that Sunstate stipulated

that about twenty percent of its contracts did not involve delivery or pick up of equipment. More importantly, we are

constrained by the language of the statute and the definitions the Legislature provides.

21
318 (Tex. 2009) (citation omitted) (“Unambiguous statutory language is interpreted according to its

plain language unless such an interpretation would lead to absurd results.”). We conclude that in

enacting subsection (k-1), the Legislature made available to certain rental and leasing companies the

same COGS subtraction available to entities in the business of selling goods. In other words, the

costs that can be subtracted as COGS under section 171.1012 do not change simply because an

entity qualifies for a subtraction under subsection (k-1). Regardless of the business model, the

expense must find a home in those costs described as COGS in subsections 171.1012(c) through (f). 

To summarize, Sunstate points to section 171.1012(c)(1), (3), (6), (8), and (11) as explicitly

authorizing it to subtract its direct costs for labor, fuel, depreciation, maintenance, and property taxes

associated with delivery and pick up of equipment it rents to customers. Even assuming that

Sunstate’s costs generally fit within those listed categories, Sunstate does not derive those costs from

the initial acquisition of its equipment or from the production of its equipment. We therefore agree

with the court of appeals that those costs are not properly subtracted as COGS under section

171.1012(c). See 578 S.W.3d at 540.

2. Indirect but Related Costs

Sunstate argues that it is entitled to subtract its insurance costs associated with delivery and

pick up as indirect but related costs under section 171.1012(d)(6). See TEX. TAX CODE

§ 171.1012(d)(6). Section 171.1012(d) authorizes a COGS subtraction for “costs in relation to the

taxable entity’s goods,” listing specific costs, including “the cost of insurance on a plant or a facility,

machinery, equipment, or materials directly used in the production of the goods.” Id. Although the

costs at issue may be “in relation to” Sunstate’s goods, as subsection (d) requires, the listed category

22
of costs at issue here requires more—it requires a direct connection to “production of the goods.” 

Id. As we have discussed, “goods” in this case refers to the heavy construction and industrial

equipment Sunstate rents out through its contracts. And, as discussed above, Sunstate’s costs

associated with delivery and pick up of equipment are outside the definition of “production.” 

Sunstate stipulated that it seeks to subtract insurance costs and expenses “for the delivery vehicles

and the employees who operated the delivery vehicles.” Consistent with our conclusion above, we

conclude that the insurance costs associated with delivery and pick up of rental equipment are not

“directly used in the production of the goods” within the meaning of section 171.1012.

3. Administrative Overhead Costs

The Comptroller recategorized the costs at issue as “administrative overhead costs.” See id.

§ 171.1012(f). Section 171.1012(f) authorizes a taxable entity to “subtract as cost of goods sold

indirect or administrative overhead costs . . . that it can demonstrate are allocable to the acquisition

or production of goods.” Id. The provision enumerates certain “mixed service costs” that fall within

the category of administrative or overhead costs and thus are treated differently from “services”

generally. See id. § 171.1012(a)(3)(B)(ii), (f). Subsection (f) does not abandon the statute’s focus

on cost associated with acquiring or producing goods; in fact, it requires that any costs included as

COGS under subsection (f) must be “allocable to the acquisition or production of goods.” Id. 

§ 171.1012(f). Although “allocable” is not defined in the statute, a cost is allocable when it is

“apportion[ed] for a specific purpose.” Allocate, WEBSTER’S NEW INT’L DICTIONARY (2002). 

Subsection (f) maintains that acquisition and production of goods is that specific purpose. See TGSNOPEC Geophysical Co., 340 S.W.3d at 441 (determining the meaning of a term by looking to the

23
“statute in its entirety”). Consistent with our discussion above, we conclude that Sunstate’s costs

are not properly included as COGS under subsection (f) because they are for the specific purpose

of delivering and picking up rental equipment, not for acquiring or producing the equipment.

In sum, subsection (k-1) extends theCOGS subtraction otherwise allowed to sellers of goods,

allowing heavy construction rental or leasing companies to also benefit from the COGS subtraction

available under section 171.1012. A taxable entity can include in its COGS determination certain

costs in the initial acquisition or production of a good it sells, rents, or leases; subsection (k-1) does

not expand the types of costs that a rental company can subtract as part of its taxable margin

calculation. Here, Sunstate admits that its costs are unrelated to acquiring the equipment it will

eventually rent. We hold that Sunstate’s costs associated with the delivery and pick up of its rental

equipment are not costs for producing Sunstate’s equipment. For these reasons, subsection (k-1)

does not authorize Sunstate to subtract these costs as COGS.

C. Subsection (i)

Sunstate argues in the alternative that even if subsection (k-1) does not authorize it to

subtract its costs associated with delivery and pick up of equipment, subsection (i) provides an

independent authorization for subtraction of those costs. Relying on the court of appeals’ opinion

in Gulf Copper, Sunstate reasons that the delivery of equipment to its customers’ job sites and the

subsequent pick up of the equipment is “an essential and direct component of the project for

construction or improvement of real property.” See 535 S.W.3d at 14 (citing Combs v. Newpark

Res., Inc., 422 S.W.3d 46, 56 (Tex. App.—Austin 2013, no pet.)). Sunstate does not assert that it

qualifies under subsection (i) because it furnishes materials. See TEX. TAX CODE § 171.1012(i). 

24
Rather, according to Sunstate, the labor used to provide the equipment qualifies under subsection

(i) because it is “an essential and direct component” of the customer’s construction projects, which

could not occur without the equipment.

As with subsection (k-1), the Legislature in subsection (i) extended the COGS subtraction

to entities not otherwise entitled to subtract COGS. See id. § 171.1012(a)(1), (k-1), (i). Subsection

(i) provides that “[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.” Id. § 171.1012(i). Thus, a taxable entity qualifies for a COGS

subtraction under subsection (i) if it satisfies two requirements: (1) it furnishes labor or materials,

and (2) that labor or materials is furnished to a project for the construction, improvement,

remodeling, repair, or industrial maintenance of real property.9

 See id. Because the entity is treated

as an owner, it “may include the costs, as allowed by this section, in the computation of cost of

goods sold.” Id. (providing that a taxable entity normally may subtract COGS only if it “owns the

goods,” but an entity that can be considered an owner of labor or materials under subsection (i) may

also subtract COGS). In this case, Sunstate contends that it satisfies subsection (i)’s two

requirements and is entitled to subtract COGS because it delivers its heavy construction equipment

to its customers’ job sites and then picks the equipment up from the job sites—furnishing labor to

its customers’ real property construction projects. 

9

 Although subsection (c) allows a qualifying entity to include certain labor and materials costs in its COGS

calculation, subsection (i) requires a different analysis of labor and materials. See TEX.TAX CODE § 171.1012(c)(2), (3). 

Under subsection (i), an entity’s business activities must be evaluated to determine whether it qualifies to subtract COGS

as an owner of labor or materials. Thus, it is not the existence of costs for labor or materials that qualifies an entity to

subtract COGS under subsection (i), it is that the entity “furnish[es] labor or materials to a project for the construction,

improvement, remodeling, repair, or industrial maintenance . . . of real property.” Id. § 171.1012(i).

25
In determining whether Sunstate qualifies to subtract COGS under subsection (i), we assume

that the labor Sunstate provides to deliver and pick up equipment satisfies the first requirement of

the analysis—namely, that it “furnish[es] labor” within the meaning of the statute.10 Turning to the

second requirement of the analysis, Sunstate argues that it qualifies to subtract COGS because the

labor it provides is essential to its customers’ construction projects. Under subsection (i), a taxable

entity may subtract COGS only if the labor or materials is furnished “to a project for the

construction, improvement, remodeling, repair, or industrial maintenance . . . of real property.” Id.

The Legislature did not define “project.” An undefined term will receive its “common, ordinary

meaning unless a contrary meaning is apparent from the statute’s language.” Tex. State Bd. of

Exam’rs of Marriage & Family Therapists, 511 S.W.3d at 35 (citation omitted). “To determine a

statutory term’s common, ordinary meaning, we typically look first to [its] dictionary definitions and

then consider the term’s usage in other statutes, court decisions, and similar authorities.” Id. (citing

Epps, 351 S.W.3d at 866). If “an undefined term has multiple common meanings, we apply the

definition that is most consistent with its use in the context of the statute.” Beeman v. Livingston,

468 S.W.3d 534, 539 (Tex. 2015) (citing State v. $1,760.00 in U.S. Currency, 406 S.W.3d 177,

180–81 (Tex. 2013)).

10 Although Sunstate argues only that it furnishes labor to construction projects and does not contend that it

furnishes materials, we note that the Legislature has drawn a clear distinction between “materials” and “equipment.” 

Each term appears separately in sections 171.1011 and 171.1012, indicating the Legislature’s intent that the terms not

be treated as synonymous. See TEX. TAX CODE §§ 171.1011 (w-1) (referring to “cost of labor, equipment, fuel, and

materials”), 171.1012(d)(6) (referring to “the cost of insurance on a plant or a facility, machinery, equipment, or

materials”). Thus, furnishing equipment does not equate to furnishing materials within the meaning of section

171.1012(i). See Needham, 82 S.W.3d at 318 (citation omitted) (“[T]erms should be interpreted consistently in every

part of an act.”); see also TEX. GOV’T CODE § 311.021(2) (instructing that courts should presume “the entire statute is

intended to be effective”).

26
“Project” means “a specific plan or design.” Project, WEBSTER’S NEW INT’L DICTIONARY

(2002). Section 171.1012(i) specifies the type of plan or design to which labor or materials must

be furnished, stating that it must be a project “for the construction, improvement, remodeling, repair,

or industrial maintenance . . . of real property.” TEX. TAX CODE § 171.1012(i). To subtract COGS

under subsection (i), a taxable entity cannot simply furnish labor or materials to any type of project;

rather, the labor or materials must be furnished to a project that is of the specific type identified in

the statute. Id. And the statute provides a list of real property projects that will satisfy the second

requirement: construction projects, improvement projects, remodeling projects, repair projects, and

industrial maintenance projects.11 Id. Thus, within the context of the statute, a COGS subtraction

under subsection (i) is available to an entity that contributes labor or materials to another’s real

property project of one of the types listed.12 See Garrett, 283 S.W.3d at 853 (interpreting terms

within the context of the statute); see also Beeman, 468 S.W.3d at 539 (citation omitted) (“When

an undefined term has multiple common meanings, we apply the definition that is most consistent

with its use in the context of the statute.”); Project, WEBSTER’S NEW INT’L DICTIONARY (2002)

(providing an alternative definition for project: “a planned undertaking: . . . as an undertaking

devised to effect the reclamation or improvement of a particular area of land”). 

11 This requirement is akin to the “production” of tangible personal property. TEX. TAX CODE § 171.1012(a)

(defining production to include construction, development, and improvement).

12 An owner of real property that conducts its own real property project would not need to resort to the provision

at issue here for subtraction of COGS, as that entity “owns the goods”—the real property—and is therefore entitled to

subtract COGS under subsections (c) through (f). See TEX.TAX CODE § 171.1012 (a), (c)–(f), (i). When a taxable entity

does not own the real property but contributes to the real property owner’s project for construction, improvement,

remodeling, repair, or industrial maintenance by furnishing labor or materials, that entity qualifies for a COGS

subtraction pursuant to the provision of subsection (i) at issue here.

27
Sunstate certainly provides construction equipment that is ultimately used on real property. 

In fact, the very purpose of Sunstate’s business and the rental agreements it executes with customers

is for Sunstate to provide heavy construction equipment for such projects. But, the issue under

subsection (i) is not whether Sunstate provides equipment to a real property construction project;

rather, the issue is whether Sunstate is correct that the labor furnished in delivering and picking up

equipment is provided “to a project for the construction, improvement, remodeling, repair, or

industrial maintenance . . . of real property.” TEX. TAX CODE § 171.1012(i). In other words, is that

labor furnished to the real property owner’s construction project? Sunstate admits that the delivery

and pick up of equipment is ancillary to the purpose of its contracts—equipment rental. The labor

Sunstate expends to move that equipment from one location to another is labor furnished to

Sunstate’s own project of fulfilling its contractual obligations to provide the equipment to customers. 

That labor is not furnished to a project for the construction or improvement of real property, within

the meaning of the statute.

Sunstate’s construction of subsection (i) would amount to a but-for test. Sunstate asserts that

its delivery and pick up of construction equipment is an “essential and direct component of the

‘project for the construction . . . of real property.’” See 578 S.W.3d at 541 (citation omitted). As

Sunstate sees it, if the labor is essential to the real property project or if the real property

construction or improvement could not occur but for the labor being furnished, then Sunstate

contends it qualifies to subtract COGS under subsection (i). But the statute does not contemplate

such a test. It prescribes only that the entity “furnish[] labor or materials to a project for the

construction . . . of real property.” TEX. TAX CODE § 171.1012(i). Because the Legislature did not

28
include an “essential to” or “but for” element for an entity to qualify under subsection (i), we decline

to add one. Indeed, in some sense, almost any labor could be characterized as meeting that test, no

matter how remote or indirectly related to the real property. Such an interpretation of the statute

would be counter to the Legislature’s requirement that labor be furnished “to a project for

construction, improvement, remodeling, repair, or industrial maintenance . . . of real property.” Id.

Because Sunstate furnishes labor to fulfill its own obligations under its rental agreements rather than

furnishing the labor to another’s real property construction project, it cannot be considered “an

owner of that labor or materials” for purposes of section 171.1012 and may not include “the costs,

as allowed by this section, in the computation of cost of goods sold.” Id.

VI. Conclusion

We hold that neither section 171.1012(k-1) nor section 171.1012(i) authorizes Sunstate to

subtract as COGS any of its costs associated with the delivery and pick up of its rental equipment. 

Under section 171.1012(k-1), the Legislature authorized heavy equipment rental or leasing

companies to subtract COGS, but the COGS subtraction is limited to the costs allowed under section

171.1012(c) through (f). While Sunstate qualifies as an entity authorized to subtract COGS under

subsection (k-1), its costs at issue here are not for acquisition or production of the equipment it rents

to customers and do not fall within the allowable direct, related, or administrative overhead costs

provided in the statute. Under subsection (i), Sunstate does not “furnish[] labor or materials to a

project for the construction, improvement, remodeling, repair, or industrial maintenance . . . of real

property,” and therefore does not qualify as an entity entitled to subtract COGS. Id. Because

29
Sunstate is not entitled to the subtraction it claims under either subsection, we affirm the judgment

of the court of appeals.

______________________________________

Paul W. Green

Justice

OPINION DELIVERED: April 3, 2020

30