### T E X A S C O U R T O F A P P E A L S , T H I R D D I S T R I C T , A T A U S T I N

NO. 03-12-00515- CV

Sus an Com bs, Com ptroller of P ubl ic Acc ounts of the State of T exas; and Gr eg Abbott, At torney G eneral of the State of Texas, Appellan ts

v. Newpark Resources, Inc., Appellee

F ROM TH E DISTRI CT COURT O F TRAVIS CO UNTY, 250 TH JUDICI AL DISTRICT NO. D-1 -GN-1 1-0 0220 5, H ONO RAB LE TIM SULAK , JUDGE P RESIDING

O P I N I O N

I n this suit to rec over fra

nchise taxes paid under prot es t , ap p ellants Susan Combs, Comptroller of P ublic Acc ounts for the State of Tex as, and Gre g Abbott, At torney Gene ral of the State of Texas (collec tively , the Comptroller), appea l from the trial court’s final judgme nt in favor of appellee Newpa

rk Resource s, I nc. On appea l, the Comptroller asser ts that the trial court err ed in concluding that Newpa

rk was entitled to a tax re fund beca use (1) Newpa

rk’s subsidiary , Newpa

rk Environmental Service s, L L C (NES), did not qu alify for a cost-of- g oods-sold deduction and (2) Newpa

rk was not entitled to ex clude from its total reve nue NES’s pay ments to subc ontrac tors. See Tex. Tax Code §§ 171.1011(g )(3) , 171.1012. We affir m the trial court’ s judgme nt.BACK GR OUND

Structure of the f

ranchise tax Be cause this Court has not previou s l y an al y zed the most rec ent incar nation of Texas’s fra

nchise tax, we beg in our discussion with a brief overvie w of the fra nchise t ax . The fra nchise tax is a tax on the value and privileg e of doing business in T exas. See In re Nestle USA , Inc. , 387 S.W .3d 610, 612 (Tex. 2012 ) (orig

. proce eding ). The tax was enac ted in 1 893 but has been signific antly restruc tured sever al times. See id. at 612–13 (discussing history of fra nchise tax). The curr ent version o f the fra nchise tax is codified in chapte r 171 of the Tax Code, which was adopted in 2006 as part of the leg islature’s “ef fort to pr ovide lasting proper ty tax relief

, establish a stable and long- term source of funding for public schools, an d meet the J une 1, 2005 deadline
set in W est Orange-Cov e .” In re Allcat Claims Serv., L.P. , 356 S.W .3 d 4 5 5 , 4 5 8–59 (Tex. 2011) (orig

. proce eding ) (citing Neeley v. W est Orange-Cov e Consol. Indep. Sch. Dist. , 176 S.W .3d 746, 753–54 (Tex. 2005) (conc luding that previous school-funding scheme was unconstitutional)). “The
tax is still based primarily on reve nue and only seconda rily on capital, and now applies to ever y forprofit entity doing business or char tere d in Texas that is distinct from its owner s.” In re Nestle USA , 387 S.W .3d at 614.

As the supreme court explained, the curr ent fra nchise tax is g ener ally calc u l at ed using the following formula:

Total Revenue

– Gene ral Deduc tion: the g rea ter of eith er the Cost of Goods Sold, C ompensation, or 30%
2= Marg in

x Perce ntag e of g ross rec eipts from Texas business

= Taxable Marg in

x Tax Rate (0.5% for entities p ri m arily eng ag ed in wholesale or re tail trade, 1% for a ll others)

= Fr anchise tax

Id. The calculation of t o t al revenue is g overne d by section 171.1011 of t he Tax Code. Gene rally , total reve nue is “income repor ted to the fede ral I RS with various deductions, limit ations, and exceptions.” See id. at 615 (listing sever al exclusions from total reve nue). The rele vant reve nue exclu s i o n in this case is set out in section 171.1011(g )(3) and require s a taxable entity to exclude fr o m total reve nue all “flow- throug h funds that are mandated by contra ct to be distributed to ” subcontrac tors that “provide service s, labor, or materia ls in connec tion with” various improvements
to rea l property

.

After calc u l at i n g total reve nue, a taxable entity may take one of three g ener al dedu ct i o n s : co st of g oods sold, compensa tion, or 30% of total reve nue. The cost-of- g oods-sold deduction, which is the deduction Newpa rk elec ted t o take in this case , is g overne d by section 171.1012 of the Tax Code. This provision allows a company to deduct “‘a ll direc t costs of acquir ing

or producing g oods,’ some indirect costs like insurance , utilit ies, and quality control, and up to 4% of other ‘indirec t or administrative overhe ad costs.’” See id. (quoting Tex. Tax Code § 171.1011(a) (1), (c) –(d), ( f))

.

3Newpa rk and its subsidiaries are “[a]ffiliated entities eng ag ed in a unitary business.” In re Nestle USA, Inc. , 387 S.W .3d at 614; see also Tex. Tax Code § 171.1014. There fore , Newpa rk fi les a single tax repor

t for the combined g roup. The g roup must elec t to take the same g ener al deduction—mea

ning al l members must take either a cost-of- g oods-sold, compensa tion, or 30% deduction. See Tex. Tax Code § 171.1014(d). Wit h this backg round in mind, we turn to the specific fac ts of this case.

F actual and p roce dural b ackground

Newpa rk descr ibes itself as an “integ rate d oilfield service s company ,” providing service s to third-par

ty “exploration and production companies” that are nece ssary for the drilling of oil and g as wells. Newpa

rk’s primary business activity —at least with respe ct to the disputed issues in this c a s e

— involve s the manufa cture , sale, injection, and remova l of “drilling mud.” Drilling mud 1 is a product that is injected into a well hole as it is being drilled to cool and lubricate the drill as well as to fac ilitate the remova l of rock, soil, and othe r “w aste mate rial” f rom the hole. N e w p a r k , a s th e p a

r e n t c o mpany , uses sever al subsidiaries for its various d r il li n g - mu d opera tions. One subsidiary manufa cture s the industrial minerals that g o into making drilling mud; another subsidiary produce s, sells, injects , an d re m o ves the drilling mud from the well; and NES—the main subsidiary at issue in this appea l—removes the re s u lting nonhazardous waste materia ls from the drilling site, transports the waste to NES’s underg round disposal sites, and injects

Newpa rk also provides other service s to drilling opera tions, including manufa cturing and 1 renting “composite mats” and other “initial planning and drill-site-location an d co n s truction s er v ices.” Although these other activities may be included in Newpa rk’s overa ll reve nue and, by extension, be subject to the fra nchise tax, they are g ener ally not rele vant to the issues in this appea l.

4the waste into the sites for perma nent disposal. NES hires subcontrac tors to opera te the trucks and barg es that haul wa ste to the disposal sites.

Newpa rk explained tha t its customers g ener ally purcha se Newpa rk’s service s as an “integ rate d service packa g e” rathe r than s ep ar ately from eac h subsidiary

. Contracts are usually betwee n the customer and Newpa rk and its “subsidiaries and aff iliated companies unless expressly excluded by written agr eeme nt.” These contrac ts g ener ally do not specify what subcontractors, if any , Newpa

rk or its subsidiaries will use to provide their se rvice s. The Comptroller conduct ed a “desk audit” of Newpa rk’s fra nchise-ta x returns for 2008 and 2009 and asked Newpa rk to expl ai n i t s subsidiaries’ business activities. Newpa rk explained NES’s business as outlined above, and based on th at d es cripti on, the Comptroller deter mined that Newpa

rk owed an additional $186,547.03 for 2008 and $205,698.98 for 2009, plus penalties and interest. This adjustment was ba sed on the Comptroller’s determination that NES’s disposal o f wa s te materia l was a service that did not qualify for a cost-of- g oods-sold deduction. Newpa rk paid the a dditional tax under pr otest and filed this underly ing pr otest suit. I n its su i t, Newpa

rk asser ted that it was entitled to include NES’s expenses in Newpa rk’s overa ll co s t -of-g oods-sold deduction. See id. § 171.1012. Alterna tively , Newpa rk arg ued that it was entitled to exclude a near ly equivalent amount from its total reve nue based on NES’s flow-throug h pay

ments to subcontrac tors for ha uling the w aste. See id. § 171.1011(g )(3)

. 2

As the statute makes clea r, if a taxable entity excludes flow-throug h pay ments to 2 subcontrac tors from its total reve nue, it cannot claim those same pay ments in its cost-of- g oods-sold deduction. See Tex. Tax C o d e § 1 7 1

. 1011(i). The value of Newpa rk’s alleg ed exclusions and deductions are not in dispute, and NE S ’s proposed cost-of- g oods-sold deduction is slightly larg er than its proposed flow- throug h reve nue exclusion. 5Newpark also claimed additional cost-of- g oods-sold deductions for its various indirect and

administrative overhe ad expenses that wer e not inc luded in N ewpa rk’s orig inal tax re turn. See id. § 171.1012(f)

. Following a bench tr i al , t h e t rial court rende red a final judgme nt in Newpa rk’s favor , concluding that Newpa rk was ent i t l ed t o a refund of $472,872, plus statutory interest. The Comptroller did not timely reque st, and the trial court did not issue, finding s of fac t and conclusions of law. Howeve r, to rea ch the amount of Newpa rk’s ref und, the trial court must have conclude d that Newpa rk was entitled to claim NES’s expenses—including its indirect and administrative overhe ad

e xp e n s e s

— in N e w

p a r k ’ s o v e r a ll c o s t- o f

- g o o d s - s o ld d e d

u c ti o n . S e e s u p r a n . 2

. T h is a

p p e a l f o ll o w e d

.
STANDARD OF REVIEW The trial court, acting as factfinder , is the s ole j udg e of cre dibilit y of t he witnesses and weig ht to be g iven to their testimony

. McG alliard v. Kuhlmann , 7 2 2 S

. W .2d 694, 696 (Tex. 1986). Where, as in this case , no finding s of fact or conclusions of law are filed or requested , we must infer that the trial court made all finding s nece ssary to support its ju dg ment. Holt Atherton I n d u s . , I n c . v . H e in e , 8 3 5 S. W. 2 d 8 0 , 8 3 ( T e x. 1 9 9 2 )

. Wh e n th e im p li e d f in d in g s o f f

a c t a r e s u p p o r te d by the evidenc e, we must aff irm the trial court’s judgme nt o n an y t h eo ry o f law applicable to the

case . See In re W

.E.R. , 669 S.W .2d 716, 717 (Tex. 1984); Carroll ton-Farmers Branch Indep. Sch. Dist. v. JDP, I

nc. , 168 S.W .3d 184, 188 (Tex. App.—Dallas 2005, no pe t.). T h e i ssues in this case primarily conce rn t he proper construction of chapter 171 of th e T a x Co d e . S

e e ge n e r a ll y T e x. T a x Co d e § § 1 7 1

. 1 0 1 1

– . 1 0 1 4

. St a tu to r y c o n s tr u c ti o n is a q

u e s ti o n of law tha t w e revie w de novo. See First Am. Titl e Ins. Co. v. Combs , 258 S.W .3d 627, 631 (Tex.
62008). When construing a s t at u t e, our primary objective is to asce rtain and g ive eff ect to the leg islature’s intent. Id. at 631–32. I n deter mining leg islative intent, we fi rs t co n s ider the plain lang uag e of the statute. GMC v. Bray , 243 S.W .3d 678, 685 (Tex. App.—Austin 20 0 7 , n o p et.). When statutory text is clea r, it is deter

minative of leg islative intent, unless enfo rcing the plain

m eaning of the statute’s words would produce an absurd result. Entergy Gulf States, Inc. v. Summers , 282 S.W .3d 433, 437 (Tex. 2009). We consider the statute as a whole, rea ding eac h word in context rathe r than in isolation, and unless a differ ent definition is supplied by the leg islature, we

assume the words c hosen have their plain and or dinary meaning

. See City of Rock well v

. Hughes , 246 S.W .3d 621, 625–26 (Tex. 2008). Our analy sis is informed by the presumption that “the entire
statute is intended to be eff ective” and that “a just and rea sonable result is intended.” See Tex. Gov’t Code § 311.021(2), (3); Shook v. W alden , 304 S.W .3d 910, 917 (Tex. App.—Austin 2010, pet. denied)

. Only when the statutory text is ambig uous “do we resor t to rules of construction or extrinsi c aids.” Shook , 304 S.W .3d at 917 (interna l quotations omitted); see also Combs v. Metropolitan Life 3 Ins. Co. , 298 S.W .3d 793, 796–97 (Tex. App.—Austin 2009, pet. denied).

DISCUSSIO N The Comptroller raises four issues on appea l, which we g roup into the following two cate g ories. First, the Comptroller asser ts that NES provides only service s, and there fore its expenses d o n o t q ualify for a cost-of- g oods-sold deduction. Second, the Comptroller arg ues that NES ’s pay ments to its subcon t ra ct o rs do not constitute “flow- throug h funds” that can be excluded from

The parties disput e wh et h er t h e cost-of- g oods-sold deduction is “an imposit ion of a tax 3 rathe r than an exemption,” whic h aff ects whether the tax is strictly construed in favor of or ag ainst the taxpay er. See Upjohn Co. v. Rylander , 38 S.W .3d 600, 606 (Tex. App.—Austin 2000, pet. denied) . Howeve r, this rule of c onstruction only applies if the statute is ambig uous. See id. 7total reve nue because Newpa rk’s contracts with its customers did not require Newpa rk or NES to use those subcontra ctors.

The parti e s c o n c e d e that if Newpa rk can include NES’s expenses in its cost-of- g oodssold deduction, then the t rial cour t’s judgme nt in Newpa

rk’s favor must be affirmed reg ardle ss of whether Newpa

rk can also exclude its flow-throug h pay ments from tot al rev en u e. S ee supra n.2. T h erefore , we will addre ss the cost-of- g oods-sold issue first beca use it may be dispositi v e i n t h i s

case . See Carroll ton-Farmers Branch Indep. Sch. Dist. , 168 S.W .3d at 188 (noting that appellate 4
court will aff

irm trial court’s deter

mination of tax if corr ect on any leg al theory prese nted); see also Tex. R. App. P. 47.1 (re quiring appellate courts to hand down opinions that are as short as possible while addr essing ever

y issue nece ssary

to disposit ion). I n its first, third, and fourth issues on appeal , t h e Comptroller challeng es the trial court’s deter

mination of Newpa

rk’s overa ll cost-of- g oods-sold deduction. Specifica lly , the 5

I n addre ssing the c ost-of-g oods-sold-deduc tion issue first, we in no way sug g est that the 4 Comptroller or taxable entities are fre e t o deter mine a g ener al deduction befor e deter mining total reve nue. Howeve r, in this case , the parties conce de that if Newpa rk was entitled to take the cost-ofg oods-sold deduction, the trial court’s judgme nt must be aff irmed. There fore , althoug h the cost-ofg oods-sold deduction is not a stand-alone theory for deter mining fra

nchise tax, in this specific case , it is a stand-alone theory for aff irming the trial court’s judgme nt. See Tex. R. App. P. 47.1 (re quiring courts of a

ppeals to hand dow n opinion that is as brief as pr actica ble while addr essing ever y issue nece ssary for f inal dispositi on). The Comptroller’s first, third, and fourth issues rela te to w hether NES’s direc t e x penses, 5 administrativ e-ove rhea d costs, and pollution-control costs qualify for the cost-of- g oods-sold d e d u c ti o n . S e e T e x. T a x Co d e § 1 7 1

. 1 0 1 2 ( c ) ( 7 ) , ( f ) , ( i)

. A s th e Co mp tr o ll e r c o n c e d e s , if N E S’ s d ir e c t e xp e n s e s a

r e d e d u c ti b le a s a c o s t o f g o o d s s o ld , th e n N E S ma y a ls o d e d u c t it s a d mi n is tr a ti v e - overhe ad and pollution-control costs. As part of its fourth issue, the Comptroller also asser ts that there is no evidenc e to substantiate how much Newpark spent o n i t s p ollution-control costs. Even assuming that this arg ument was not waived as inadequa tely briefe d, see Tex. R. App. P. 38.1(i), we conclude that there is sufficie nt testim o n y an d d o cumentation in the rec ord to support the trial court’s valuation of NES’s pollution-control costs. 8Comptroller arg ues t hat bec ause N ES provides only service s, it does not sell any g oods for which

it could claim a co s t-of-g oods-sold deduction. There fore , acc ording to the Comptroller, the trial
court e rre d in including NE S’s expenses in Newpar k’s over all cost-of- g oods-sold deduction. As we will discuss, the resolution of this issu e involves two separ ate questions. First, in deter

mining cost of g oods sold, do we consider eac h member of a combined g roup’s b u s i n ess in the context of the combined g roup’s business as a whole, rathe r than trea ti n g ea ch member as if it we re a stand-alone company ? Second, does NES “fur nish[ ] labor or materia ls to a projec t for the construction

. . . of rea l proper ty ” such that it can include the cost of that labor or materia l in its cost of g oods sold? See Tex. Tax Code 171.1012(i). Under the fac ts of this case , we

answe r y es to both questions, and there fore we aff irm the trial court’s implied finding that Newpa rk

was e ntitled to include NES’s expenses in its cost-of-g oods-sold deduction.

Do we consid er N ES’s expenses in the conte xt of Newp ark’s over all sales?

I n its brief, the Comptroller repe atedly emphasizes that NES does not sell any g oods in the ordinary course of i t s business, and there fore it cannot qualify for any cost-of- g oods-sold deduction. See i d

. § 1 7 1

. 1 012(a) (1), (c)–( d) (defining “g ood” and listi ng sever al costs associate d with production and sale of g oods that can be deducte d). Acc ording to Newpa rk, t h i s ar gu m ent undersc ores the f

ault in the Comptroller’s ana ly sis, in that the Comptroller incor rec tly views NES

as an isolated business rathe r than as a part of Newpa rk. The Comptroller’s analy sis, a ccor ding to Newpa rk, is inconsistent with the plain lang uag e of the statute. 6

I t is not entirely clea

r whether the Comptroller ac t u ally asser ts that NES’s activities 6 must be viewed in isolation. I n its brief, the Comptroller states that “an entity which would not be 9W e ag ree with Newpa rk that the plain lang uag e of the statute does not support the Co m p t ro ller’s interpre tation that section 171.1014(e) (1) require s eac h member’ s business to b e v i ew ed in isolation when deter mining the member’ s elig ibilit y to take a cost-of- g oods-s o l d deduction. Section 171.1014 g ener ally g overns when and how a combined g roup files a combined repor t, and subsection (e) delineate s how the combined g roup calc ulates i t s co s t -o f-g oods-sold deduction. This subsection states:

Fo r p u rp oses of Section 171.101, a combined g roup that elec ts t o subtract c osts of g oods sold shall determine the amount by : (1) determining the cost of goods sold f o r each of its membe rs as provided by Section 171

. 1 0 1 2 as if the membe r were an individual taxable entity ; (2) adding the amounts of the cost of g oods sold deter m i n ed under Subdivis ion (1) tog ether ; and (3) subtracting from the amo u n t deter mined under Subdivis ion (2) any cost of g oods sold amounts paid from one member of the combined g roup to another member of the combined g roup, but only to the extent the corr esponding item of total r evenue was subtra cted under Subsec tion (c)( 3).

Id. § 171.1014(e) (empha sis added).

elig ible for the Cost of Goods Sold deduc tion if it we re an individual taxable entity must c alculate its Cost of Goods Sold deduction as zero.” Thi s l an gu age could be rea d to support Newpa rk’s arg ument that the Comptroller attempts to look at NES—and by extension all subsidiaries—as if it w e r e a s ta n d

- a lo n e b u s in e s s , c o mp le te ly s e p a r a te f r o m it s p a r e n t c o mp a

n y . H o w e v e r , th e Co mp tr o ll e r also arg ues that the analy sis woul d b e the same even if NES wer e part of the subsidiary that sold drilling mud beca

use NES’s activities are s t i l l o n l y s er vices. Thus, it is unclea r whether the Comptroller actua lly attempts to analy ze NES in isolation. Neve rtheless, beca us e re s o l ution of this issue is fundame ntal to our dispositi on of this c ase, we will a ddress Newpa rk’s arg ument that, when deter

mining NES’s cost-of- g oods-sold deduction, NES’s activities must be considere d in the context of Newpa

rk’s ove rall business. 10S u b s ec t i o n 171.1014(e) is an acc ounting mecha nism that adds up eac h member’ s cost of g oods sold while eliminating any “double counting ” of intra-g roup sales or transfe rs. Given that this provision is eff ectively a proce dural tool, i t wo u l d b e i nconsistent to trea t subsection 171.1014(e) (1) as an additional substantive limitation t hat would require each member’s business activity to be viewed i n complete iso l ati on from the combined group. Cf. Sergeant Enter., Inc. v. Strayhorn , 112 S.W .3d 241, 249–50 (Tex. App.—Austin 2003, no pet.) (noting that proce dural tax tools ge nera lly

do not affe ct vested r ights of w hat ca n be taxed). This conclusion is direc tly supported by subsection 171.1014(d-1) , which states that “[a] member of a combined g roup m ay claim as costs of g oods sold those costs that qualify under Section 171.1012 if the g oods for which the costs are incurre d are owned by another member of the combi n ed gro up.” As this provision indicates, a member that does not sell any g oods itself may

never theless deduct as cost of goods s old those expenses it incur s to sell g oods owned by another

mem b er of the combined g roup. I t would be entirely inconsistent to trea t individual members as isolated entities under subsection (e) (1) but never theless allow them to deduct their costs for selling g oods that are owned by

other membe rs of the c ombined g roup. Finally , the overa ll structure of section 171.1014 supports the conclusion that when deter mining the fra

nchise tax of a co m bined g roup, we consider the g roup as whole, not eac h member in isolation. See City of Rock well , 246 S.W .3d at 625–2 6 (n o t i n g t h at courts consider
statute as a whole and rea d words in context, not in i solation). As subsection 171.1014(b) clea rly states, a “combined g roup is a single taxable entity for purposes of the application of the [franchise tax] .” F urthermor e, subsection 171.1014(d) require s a combined g roup to choose to de duct either

11cost of g oods sold or compensa tion “ for all its membe rs,” there by indicating that the fra nchise tax is intended to apply to all members of a combined g roup as if they wer e a single taxpay er. See also Tex. Tax Code §§ 171.1014(h) (re quiring members of combined g roup to u s e s ame acc ounting period for deter

mining marg in a

nd apportionment), 171.1014( i) (making eac h member jointly and

sever ally liable for tax owed by combined g roup). I t would be inconsistent with this fra mework to consider a combined g roup as a single taxable entity , require eac h member to take the same g ener al deduction, b u t n ev ertheless trea t eac h member as an isolated entity for purposes of deter mining elig ibilit y to take the cost-of- g oods-sold deduction. Compare id. § 171.1014(b), (d)–( d-1), with id. § 171.1014(e) (1). Thi s conclusion would lead to the absurd result that a company that had no subsidiaries could take all costs-of- g oods-sold deductions allowable under section 171.1012, but if that s ame company cre ated subsidiaries it could potentially lose substantial cost-of- g oods-sold deductions bec ause e ach subsidiar y might not sell g oods in the ordinary course of its business. There fore , reading section 171.1014 as a whole, we ag ree with Newpa rk that eac h member’ s cost-of- g oods-sold deduction must be deter mined by considering the member’ s expenses i n t h e co n text of the combined g roup’s overa ll business. To the extent the Comptroller asser t s that section 171.1014(e)(1) require s us to look at NES in complete isol ation, that in t er p retation is in c o n s is te n t w it

h th e s ta tu te

. T h u s , u n d e r th e p la in la

n g u a g e o f s e c ti o n 1 7 1

. 1 0 1 4 , w e d e te r mi n e N E S’ s elig ibilit y to take a cost-of- g oods-sold deduction within the context of Newpa rk’s overa ll business.
Do NES’s expenses qual if y as costs of goods s old u nder sect ion 171.1012(i)? I n its primary arg

ument on appea l, the Co m p t ro l ler asser ts that Newpa

rk cannot include NES’s expenses in its cost-of-g oods-sold deduction. Specific ally , the Comptroller claims
12t h at NES’s remova l and disposal of waste materia l is a “ser vice” within the meaning of section 171.1012, and t h er ef

o re NES does not sell a g ood for which the cost-of- g oods-sold deduction coul d ap p l y . See id. § 171.1012(a) (3)( B) (i) (excluding “ser vices” from definition of tang ible persona l proper

ty ). I n its response , Newpa rk asser ts that NE S fu rn ishes labor to projec ts for the construction and improvement of rea l proper ty , and there fore Newpa

rk is entitled to take a cost-ofg oods-sold deduction for these expenses under se ction 171.1012(i). We beg in our analy sis of this issue with a brief overvie w of the cost-of- g oods-sold deduction, focusing on those sections rele vant to this appeal. For purposes of the cost-of- g oods-sold deduction, a “g ood” is “re al or tang ible proper ty sold in the ordinary course of business of a taxable entity .” Id. § 171.1012(a) (1). “Ta ng ible persona l proper

ty ” is further define d as “per sonal proper ty that can be seen, weig hed, measure d, felt,

or touched or that is perc eptible to the senses in any other manner ,” as well as various films, sound

rec ording s, and other forms of proper ty not at issue in this case . Id. § 171.1012(a) (3)( A)(i) –(iii). Howeve r, “ser

vices” are specific ally excluded from the definition of tang ible persona l proper ty

. Id. § 171.1012(a) (3)( B) (i)–(ii).

A taxable entity that elec ts to take the cost-of- g oods-sold deduction may deduct “all direc t costs of acquir ing or producing the g oods,” including labor, materia ls, handling , depre ciation, and other sunk costs rela ted to production. Id. § 171.1012(c) –(d). A taxable entity may also deduct up to 4% of its indirect or adm i n i strative overhe ad costs—such as leg al, secur ity , and acc ounting service s—provided that it can demonstrate those costs “ar e allocable to the acquisition or production of g oods.” Id. § 171.1012(f)

. Howeve r, a taxable entity g ener ally cannot include costs rela ted to the
13ac t u al sale of g oods—such as distribution, adver tising, reha

ndling, or bidding expenses—in its cost-of- g oods-sold deduction. See id. § 171.1012(e)

.

Finally , subsection 171.1012(i) cre ates a restric tion—and potential expansion—of which entities ca

n take a cost-of- g oods-sold deduction. I t states, in releva nt part:

A taxable entity may make a subtraction under this section in rela tion to t h e co s t o f g oods sold only if that entity owns the g oods.

. . . A taxable entity furnishing labor or materials to a project for t h e construction, improvement, remode ling, repa ir, or industrial maintenanc e . . . of rea l proper ty is considere d to be an owner of that labor or materia ls and may include the costs, a s a l lowed by this section , in the computation of cost of g oods sold.

Id. § 171.1012(i) (emphasis added)

. Wit h this statutory fra mework in mind, we now consider the fac ts of this case.

Newpa rk conce des that NE S ’s d i s posal of waste does not qualify as either rea l or tang ible persona l p ro p er t y , and thus NES itself does not sell a “g ood” within the meaning of the fra nchise tax. See id. § 171.1012(a) (1). Howeve r, as discussed above, we do not c onsider NES in isolation, but rathe r deter

mine whether NES’s expenses qualify as a deductible cost of selling some Newpa rk g ood. See id. § 171.1014(d-1)

. Wit hin that context, Newpa rk asser ts that NES’s expenses

are part of the overa ll labor and materia ls t h at Ne wpar k furnishes to the drilling of oil and g as

we l l s , wh ich the Comptroller does not dispute constitutes a projec t for the construction an d improvement of rea l proper ty

. S ee i d

. § 1 7 1

. 1012(i). Ba sed on the rec ord, it appea rs that NES’s

ex penses do not fit into any of t he specified costs that can be deducted under subsections (c ), (d ),

14or (f)

. There fore , if NES’s expenses qualify for a cost-of- g oods-sold deduction, they must qualify 7 under se ction 171.1012(i).

The Com ptroller asserts that NES’s remova l and disposal of drill ing mud is purely

a service and does not constitute labor furnished to a projec t for the construction or improvement of

rea l proper

ty

. The terms “labor ” and “ser vice” are not defined in c hapter 171 or i n the Tax Code. Neve rtheless, t h e Comptroller contends that the terms must have differ ent meaning s beca use section 171.1011(g )(3) lists “serv ices” and “labor ” as separ ate activities that can be rela ted to the improvement of rea l proper ty

. See id. § 171.1011(g )(3) (n o t i n g t h at taxpay er may exclude flowt h ro ug h pay

ments for “ser

vices, labor, or materia ls in connec tion with

. . . desig n, construction, remode ling

. . . on rea l proper ty ”). This use of separ at e terms, acc ording to the Comptroller, indicates that the leg islature understood service s to mean something distinct from labor with respe ct to the construction of r eal pr operty

.

Although we ag ree that t h e separ ate listi ng of service s and labor in section 171.1011(g )(3) indicates that they encompa ss differ ent conc ep t s , t h e fac t that the terms are listed separ at el y does not mean they are mutually exclusive. See Matagorda Cnty. Appraisal Dist. v. Coastal Liquids Partners, L.P. , 165 S.W .3d 329, 334–35 (Tex. 2005) (noting that cate g ories listed separ ately in statute can still overlap) . Fur thermore , the fa ct that sec tion 171.1011(g )(3) indicates that labor and service s h av e d i s t inct meaning s does not provide us with clea r guidanc e as to what

The remova l and disposal of waste from the drilling site is not an aspec t of the acquisition 7 or production of drilling mud, nor is it a result of d et er i o ra t i o n, spoliag e, or other sunk cost associate d with the production of drilling mud. See Tex. Tax Code § 171.1012(c) –(d). I n addition, NES’s remova l and disposal of waste d o es n o t constitute an indirect or administrative overhe ad cost of produc ing a

g ood. See id. § 171.1012(f)

. 15that distinction is. Neither term i s define d in the s tatute, and the ordinary definitions of labor and

service s substantially overla p such that both definitions tend to ref er to the words intercha

ng eably

. 8 See City of Rock

well , 246 S.W .3d at 625–26 (noting that courts assume undefine d terms have ordinary meaning ). Webster’s D ictionary does offe r one ar g uably pertinent de finition of service s, explaining it to mean “usef ul labor that does not produce a tang ible commodity ,” noting t hat “ra ilroads, telephone companies, and phy sicians perf orm service s althoug h they produce no g oods.” See Webster’s Third Ne w I nterna tional Dictionary 2075 (Philli p Gove Ed. 2002) . Howeve r, eve n assuming we could rec oncile that definition with section 171.1011(g )(3) ’s ref ere nce to “ser

vices

. . . in connec tion with the actua l or pro p o s ed d es ign, construction,

. . . of rea l proper ty ,” the same question still rema ins—does NES furnish “labor ” to a projec t for the construction of rea l proper ty ? I n order to answer

that question, we must deter mine section 171.1012(i)’ s function. Function of section 171.1012( i) The function of section 171.1012(i) must be deter mined within the context o f the section 171.1012 g ener ally

. See City of Rock well , 246 S.W .3d at 625–26 (noting that courts consider entire statute and put words in context). We will primarily consider the conseque nces of the various proposed constructions, presuming that the leg islature intended the entire statute to be eff ective and to achieve “a just and r easona ble re sult.” See Tex. Gov’t Code §§ 311.021(3), 311.023(5)

.

Webster’s d ef

i n es “labor ” as the “expenditure of phy sical or mental eff ort espec ially 8 when fatig uing, difficult, or compulsory ,” while “ser vice” is defined a s “the pe rfor mance of work commanded or paid for by another .” See Webster’s Third New I nterna tional Dictionary 1259, 2075 (Philli p Gove Ed. 2002). Thus, both labor and service s are g ener ally work done for a

nother, with labor potentially

including a

n additional expenditure of either phy sical or menta l effor

t. 16Gene rally , section 171.1012(i) opera tes as a broad lim itation on which entiti es can

claim the cost-of- g oods-sold deduction, restric ting it to those that actua lly own the g oods they sell. See Tex. Tax Code § 171.1012(i). How ever , the s ection then provides a g ener al ex ception to this rule—stating that those that furnish labor or materia ls to cer tain projec ts rela ted to rea l proper ty are “conside red to be an owner of that labor or materia ls a nd may include the costs, as allowed by this section , in the computation of cost of g oods sold.” See id. (empha sis added)

. I t is not entirely clea r from the structure of this subsection what the leg islature was try ing to acc omplish. Did it mean that, in the contex t of i mproving rea l proper ty , a party furnish i n g l abor does not need to sell a separate g ood to qua lify for the cost-of- g oods-sold deduction? I f so, can those entities that furnish labor to the i mprovement of rea l proper ty deduct all expenses rela ted to their supply of labor as a cost of g oods sold? Can multipl e taxpay ers qualify as furnishing the same labor, there by allowing multipl e deductions for

the same e x pense? The Comptroller asser

ts that “[t] he purpose of S ec t i o n 171.1012(i) is to allow construction companies and contra ctors

. . . to act like they are t h e o wn er o f those materia ls and labor.” Otherw ise, the Comptroller notes, “construc tion companies and contra ctors could not take the Cost of Goods Sold deduction beca use they do not own the finished product.” Although this is

mere ly a litigation position and not a formal interpre tation, it is g ener ally consistent with Newpa rk’s

ex planation of the statute and a common-sense understanding that many contra ct o rs an d subcontrac tors that improve or maintain rea l proper ty do not actua lly own or sell the proper ty

. Given that rea l p ro perty itself is a “g ood” within the meaning of section 171.1012, but that many of the businesses that incur costs to improve or maintain rea l proper ty never sell that g ood, the leg islature
17could have rea sonably intended section 171.1012(i) to allow those same companies to deduct their

costs as if they

wer e a c ost of g oods sold. Otherw ise, section 171.1012(i)’s provision making the party that furnishes labor the “owne r” of that labor would be meaning less beca use, reg ardle ss of whether a contra ctor owned the labor it supplied, the contra ctor could not deduct the cost of supply ing that labor unless it also sold the rea l proper

ty or some other tang ible persona l proper ty in the ordinary course of its business. See Tex. Tax Code § 171.1012(i); see also Tex. Gov’t Code § 311.021(2) (noting that courts pre sume entire statute intended to be eff ective)

. Fur

thermore , it would make the classifica t i o n of rea l proper ty as a g ood rela tively ineffe ctual beca use a potentially larg e perc entag e of taxable en tities that incur costs to de velop or maintain rea l pr operty would never be able to deduct those costs as a cost of goods s old. Therefore, we conclude that when viewed in the contex t of section 171.1012, subsection (i) means that the party that supplies labor or materia ls to the construction, improvement, remode ling, repa ir, or industrial maintenanc e of rea l proper ty ca n d ed u ct its labor or materia l expenses as a cost of g oods sold, assuming those expenses would qualify as the cost of selling rea l proper ty

. See Tex. Tax Code § 171.1012(i) (pe rmitting deduction of labor and materia ls c osts “ as allowed by this section”)

. Having deter mined the function of s ec t i o n 171.1012(i), we can more

acc urate ly

deter mine what constitutes labor f urnished for

the improvement of r eal pr operty

. Meaning of “labor” withi n the contex t of section 171.1012

Given our conclusion that section 171.1012(i) is d esig ned to allow the party that furnishe s l ab o r for the improvement of rea l proper ty to deduct that cost as if it sold the proper ty ,

18there is no rea son to believe that “labor ” under subsection 171.1012(i) means any thing differ ent than labor under section 171.1012 g ener ally

. See Sheshunoff v. Sheshunoff , 172 S.W .3d 686, 692 (Tex. A p p . — A u s ti n 2 0 0 5 , p e t. d e n ie d ) ( n o ti n g th a t c o u r ts p r e s u me th a t s a me te r ms u s e d in s a

me c o nn e c ti o n in differ ent statutes have same meaning ). Gene rally , a taxable entity may deduct “all direc t costs of acquir ing or

producing ” g oods, including “ labor c osts.” See Tex. Tax Code § 171.1012(c) (1). “L abor” is a broad term that encompa sses a wide rang e of activities, including “expenditure of phy sical or mental eff ort espec ially when fatig uing, di fficult, or compulsory .” Webster’s Third New I nterna tional Dictionary 1259, 2075 (Philli p Gove Ed. 2002). None o f t he

s u r r o u n d in g s ta tu to r y te xt in d ic a

te s th a t la b o r h a s a mo r e li mi te d me a n in g th a n it s c o mm o n d e f

in it io n . Cf. Railroad Comm’n of Tex. v. Texas Citi zens for a Safe Future & Clean W ater , 336 S.W .3d 619, 628 (Tex. 2 011) (“[W] e have war ned ag ainst expansively interpre ting broad lang uag e wher e it is immediately prec eded by narr ow and specific terms.”)

. There fore , we presume that the leg islature intended to allow taxable entities to deduct a wide rang e of labor expenses. See Texas Dep’ t Pub. 9 Safety v. Abbott , 310 S.W .3d 670, 675 (Tex. App.—Austin 2010, no p et .) (noting courts assume broad statutory

terms have broad me aning ).

Be cause “labor ” within the context of section 171.1012(i) can be g iven a clea r and definite 9 meaning based solely on the plain lang uag e of the statute, we conclude t h at t h e statute is not ambig uous. See Entergy Gulf States, Inc. v. Summers , 282 S.W .3d 433, 437 (Tex. 2008). There fore , we do not rea ch whether the cost-of- g oods-sold deduction opera tes as an imposit ion of a tax rathe r than a tax exemption. See Upjohn Co. v. Rylander , 38 S.W .3d 600, 606 (Tex. App.—Austin 2000, p e t. d e n ie d ) ( n o ti n g th a

t th e s e p r e s u

mp ti o n s o n l y c o n s i d e r e d w h e n ta x s ta tu te is a mb ig u o u s )

. Si mi la

r ly , we ne ed not def

er to the Comptroller’ s interpre tation of the statute. Id. 19We look to the fac ts of this case to determ i n e wh et h er NES’s service s, put in

the context of Newpa

rk’s ove rall service s, qualify as labor for the construction or improvement of

rea l proper

ty

. I t is undisputed that the drilling and cons t ru ct i o n of oil and g as wells qualifies as construction or improvement to rea l property . Fur thermore , it is undi sputed that the injection and

remova l of drilling mud qualifies as labor and materia ls that are furnished for the construction of oil and g as wells. There fore , the only question is whether NES’s subsequent transport and disposal of the used drilling mud a

nd other wa ste materia l is part of the labor involved in the drilling proce ss. The Comptroller asser

ts that NES’s activit i es are akin to a g arba g e collector that picks up trash cans on the street corne r and transports the trash to the local landfill. These activities,

acc ording to the Comptroller, are clea rly a service and not labor supplied for the improvement of rea l proper ty

. Whil e the Comptroller’s hy pothetical may be true as far as it g oes, it seems that Newpa rk’s activity in the rec ord befor e us is more analog ous to a d em o l i t i o n company that tear s down a pree x isting st ructure and then remove s the resulting debris so that new construct i o n can beg in. I t would be irrational t o co n cl u d e that the demolition of the old structure is labor furnished for the construction or improvement of rea l proper ty but that the actua l remova l and disposal of the resulting debris is a service that is not part of the construction proce ss. After all, demolition without disposal would be pointless in this si tuation.

Simi larly , it is difficult to view NES’s disposal of waste materia l as though it wer e not

an essential and direc t component of the drilling proce ss. Given that simil ar costs for scra p materia l and pollution control device s are deductible as costs of producing tang i ble persona l proper ty , it follows that such expenses should also be deductible for the improvement or maintenanc e of rea l
20proper

ty

. See Tex. Tax Code § 171.1012(c) (7)–( 8), (d )( 3 ). There was testimony at trial that the
waste material was an inesca pable by product of drilling, that remova l and disposal of this waste materia l was essential to continue drilling, and that without this disposal the drilling proce ss would

come to an immediate halt. Ba sed on this testimony , the trial court could have rea sonably conclude d that the remova l and disposal o f this waste materia l was labor furnished to a projec t for the construction and improve ment of re al prope rty

.

Admittedly , other case s may prese nt a close issue as to when labor is too far remove d from the construction, improvement, remode ling, repa ir, or industrial maintenanc e of rea l proper ty to qualify for the cost-of- g oods-sold deduction under section 171.1012(i). I n this case , howeve r, we conclude that the rec ord supports the tr i al co u rt ’s implied finding that NES furnishes labor to a projec t for the construction or improvement of re al prope rty

. There fore , the t rial court did not err in including NES’s expenses within Newpa rk’s overa ll cost-of- g oods-sold deduction. We overr ule the Comptroller’s first, third, and f ourth appe llate issues.

CONCLUSION Having conclude d that Newpa rk was entitled to include NES’s expenses in its overa ll cost-of- g oo d s -s o l d deduction, we need not deter mine whether Newpa

rk could also exclude flowthroug h pay

ments to subcontract o rs fr o m NES’s total reve nue. See Carroll ton-Farmers Branch Indep. Sch. Dist. , 168 S.W .3d at188 (noting that appellate courts aff irm trial court’s deter

mination of tax if corr ect on any leg al theory prese nted); see also Tex. R. App. P. 4 7

. 1

. W e aff irm the judgme nt of the trial cour t.

21__________________________________________ Scott K. Field, Just ice Be fore Chief J ustice Jones, J ustices Pemberton a nd Field Concurring Opinion by Chief J ustice Jones Affir med Filed: De cembe r 31, 2013

22