Affirmed and Opinion filed August 31 , 2021.

In The


## Fourteenth Court of Appeals

NO. 14

- 19

- 00358

- CV

GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS; AND KEN PAXTON, ATTORNEY GENERAL OF

THE STA TE OF TEXAS , Appellant s

V.

XEROX CORPORA T ION , Appellee

On Appeal from the 201st District Court

Travis County, Texas Trial Court Cause No. D

- 1

- GN

- 17

- 003974

O P I N I O N
In this franchise

- tax dispute, the taxable entity paid franchise taxes under protest and b ro ught suit asser ting that the fra n c hise tax rate applicabl e to the entity during Repo rt Years 2008 and 2009 was 0 .5 % rather than 1.0 %

. T he Comptroller2

of Public Accounts of the St ate of Texas and the Attorney General of the State of
Texas counterclaim ed , asserting that the taxable entity ’ s cost

- of

- good

- sold
deduction sh ould have been less than the amounts reported by the e nt ity in each of
th ese years. The trial court ruled in the ta xable entit y ’ s f a vor on its clai ms and
ordered that the de fendants take nothing on their counterc laims. On app e al, the
defendants assert that the trial co urt erred in determining that the applicable
f ranchise ta x rate during the t ime p eriod at i ssue wa s 0 .5 % rather than 1.0 % and
that the trial court erred in rendering a take

- nothing judgment on their

co untercla im. We affirm the trial court ’ s judgment.

I. F A CTUAL AND P ROCEDURAL B ACKGROUND Following an audit, appella nt/defendant Gle nn Hegar , t h e Comptroller of
Public Accounts of the St ate of Texas (the “ Comptroller ” ) determined that the applicable f

ranchise ta x rate for appel lee /plaintiff Xerox Corporation for Re port Years 2008 and 2 009 (the “ Time Period at Issue ” ) wa s 1.0% rather than 0.5 %

. Xe r ox had used t he 0.5% tax rate to compute its fra nchise ta x during the Time
Period at Issue because Xerox contend ed that i t wa s p r imarily engaged in
wholesale trad e under T exas Tax Code section 171.002(c) during t his time peri od

. The Comptroller disag r e ed w ith this con tention

. I n June 201 7, the Comptroller

ass essed more tha n $2.1 million against Xer o x in fran c hise tax and in teres t f or Report Year 2008 and more t han $2.2 million in fran c hise tax and interest for Report Year 200 9. Xerox paid the assessed amo unts under protest and filed this
suit under Chapters 112 and 171 of the Texas Tax Code to reco ver the disputed

amounts

. X erox su e d the Comptroller and appellant/defendant Ken Paxton, Attorney
General of the State of Texa s (c ollectively, the “ Comptroll e r Parties ” ). The Comptr oller Parties filed a counterclaim against Xerox alleging that during the3

T i me Period at Issue Xerox h ad ov er s tated its cost of goods sold ( “ COGS ” )

. The Comptroller Parties alleged that during each r eport y ear Xerox ’ s COGS deduction
should have been much less than the amount r e ported by Xerox . The Comptroller
Par ties argued that the amount of Xerox ’ s COGS was le s s than thirty per cent of its
total revenue for each report year

. The case proceeded to a bench trial at which thr ee witness es test if ied and documentary evidence was ad mitted. The trial court rendered judgment in favor of
Xerox and against the Com ptrol le r Parties

. The trial court o rdered the Comp troller
Parties to issue one or more refun d warrants to Xerox in the amount of $4,349,56 8,
th e total amount that Xerox had p aid under protest for Time Period at Issue . Th e trial court also order ed th e Comp troller P arties to pay statutory interest on that amount under Chapter 112 of the Texas Tax Code. The trial court ordered that the Comptroller Parties take n oth ing on their countercl aim. The trial court issued forty

- six fi ndings of fact, including t h e fol lowing:

1. X erox is primarily engaged in the retail and wholesale distribution of high

end printing and publishing systems, digital multifunctional divisions, digital cop i ers, laser and solid ink printers, fax machines, docume nt manag ement software, and suppl ies suc h as toner, paper, and ink. 2. Xerox’s chief business purpose and function was to sell its various types of business equipment and supplies, which in some cases invol ved the use of lease contracts.

. . . 10. During the peri od at is sue, Xerox offered a vari ety of di stribution agreements to meet its customers’ needs. Xerox’s primary distribution agreements were purchase agreements, finance leases (sales

- type leases), operating leases, rental agreements, and bundled arrangement s. 11. All o f Xerox’s equipment was a vailabl e for sale in the ordinary course of business for customers to acquire through a purchase agreement, sales

- type lease, operating lease, rental agreement, or bundle d arrangement.4

12. Under purchase agreements, customers t ook titl e to the equipment, bore the ris k of loss, and insured the equipment. 13. Under a sales

- type lease, customers were required to make all payments under the lease (even if contract was terminat ed), bore the risk of loss on the equipment, and insured the equipmen t. 14. Xerox examined i t s sal es

- type l eases with its customers to determine whether they should be treated as a sale under Financial Accounting Standard (“FAS”) 13 and recorded the sales revenue at the inception of the lease. 15. Xerox’s lease terms of its sales

- t ype leases were gen e rally for th e entirety of the economic life of the equipment (five years). 16. Xerox also performed calculations at the inception of each lease to establish what residual value in the equipment will r emain at the end of t he lease te rm to en sure that 90 percen t of f air val ue is covered during the lease term. 17. Xerox’s sales

- type leases satisfied s u bparagraphs c and/or d of Paragraph 7 of FAS 13. 18. The collectability of the minimum lease payments is reasonably predictabl e because Xerox ensured the lea se agreements inclu d ed no n

- can ce lable provisions and cancellation penalties equaling the full value of the lease receivables. 19. Xerox’s leases provided for standard warranties in accordance with the industry’s common practi ces. 20. Under an operating lea se, cust omers were required to ma ke al l payments (even if the contract was terminated), bore the risk of loss on the equipment, and insured the equipment. The main difference between a sales

- type lease and an operating lease was that the lease term of an o perating lease was less tha n the usefu l life of the equipment and the lack of reasonably assured collectability. 21. Under a rental agreement, the term was generally shorter than the usual life of the equipment. Therefore, Xe rox’s rental agreements were no t classified as sales

- type leas e s.

. . 22. A b undled arrangement allowed customers to cont ract for all their print produ ction needs (equipment, paper, toner, maint enance) in a single agreement for a negotiated monthly price. Typically, these arrangements include an incremental, variable compone nt fo r page volumes in excess of5

contractual page volume minimums, which are ofte n expressed in terms of price per page. 23. R ev enues under these a r rangements were allocated based upon the estimated fair values of each element, considering the relative fair va lues of the lease, and non

- lease deliverables included in the bundled arrangem ent. Lease deliverables included maintenance a nd executory costs, equipment , and fi nancing, while non

- lease deliverables generally consisted of supp lies and

non

- maintenance servi ces.

. . . 26. For [ R eport Y ear ] 2008, Xerox had total reve nues of $9,737,522,675. $3,320,550,884 was related to cash sales for equipme n t, supplies , and paper, $1,869,848,142 was related to sales

- type leases for eq ui pment only, $281,232,751 was related to oper ating l eases, $2,006 ,360,936 wa s related to sales of maintenance services, $1,435,028,204 was related to sales of managed se rvices (print produ c tion), $489,770,719 was related to financing revenue, and $334,731,039 was related to other training, licensing, and

co mmission rev enue. 27. For [ R eport Y ear ] 2008, $7,605,175,730 was revenue from wholesale trade activities. The $ 7,605,175, 730 is comprised of $3,320,550,884 [which] was related to cash sales for equipment, supplies, and paper, $1,869,848,142 [which] was relat ed to sales

- t y pe leases for equipment onl y, $489,770,719 [which] was related to financing revenue, and $2,006,360,936 [ which] was related t o sales of maintenance services. This revenue was properly classified in Division F of the Standard Industrial C lassi fi cation (“SIC”) Manual. 28. For [Report Year] 2008, 78.10% ($7,605, 175,730/$9,737,522,675) of Xerox’s total revenue w as fr om wholesale distri b ution activities.

. . . 31. For [Report Y ear] 2009, Xerox had total revenues of $10,510,116,487. $3,824,324,449 was relat ed to cash sales for equipment, supplies, and paper, $2,135,586,310 was related to sales

- type leases for equipment only, $336,781,105 was related to operati ng leases, $2,021,1 4 6,603 was related to sales of maintenance services, $1,368,826,388 was rela ted t o sales of managed services (print production), $446,790,465 was related to financing revenue, and $376,643,167 was related to other training, licensing, an d commission revenu e

.6

32. For [ R eport Y ear] 2009, $8,354,317,373 was revenue from wholesale trade activi t i es. The $8,354,317,373 is comprised of $3,824,324,449 [whic h] was related to cash sales for equipment, supplies, and paper, $2,135,586,310 [which] was re lated to sales

- type lea ses for equipment only, $446,790,465 [which] was related to fi nancing re venue, and $2,021,146,603 [wh ich] was related to sales o f maintenance services. This revenue was properly

c lassified in Division F of the SIC Manual. 33. For [Report Year] 2009, 79.49% ($8,354,317,373/$10,510,116 ,487) of Xerox ’ s total revenue was from wholesal e trad e activities

.

. . . 37. For [Report Year ] 2008, Xerox originally reported a [ t ] otal COGS subtra c tion of $4,910,835,415. 38. C osts of pri nt production, services, and rentals were not included in Xerox ’ s Texas COGS on its [Report Year] 2008 franchise tax r eturn. 39. As reque sted by [the Comp troller Parties] , Xerox reviewed and updated its COGS subtra ction calculation. Upon review, Xerox determined that its [ t ] otal COGS subtraction for [Report Year] 2008 should have been $5,994,240,999. 40. For [Report Year] 2009, Xerox o riginally reported a [t] otal COGS subtraction of $4,995,383
, 684. 41. Costs of print produ ction, services, a n d rentals were not included in Xerox ’ s Texas COGS on its [Report Year] 2009 fra nchise tax return. 42. As requested by [the Comptrolle r Parties] , Xe rox re v iewed and updated its COGS subtraction calculation. Upon review, X erox determined that its [t] ota l COGS subtraction for [Report Year] 2009 should have been $6,647,888,992. 43. Testimony at trial established th at [ r esearch and d evelopment] a nd Sustained Engin e ering ( “ SE ” ) costs are not bifurcated by the type of distribution agreement that is used by th e c ust omer to acquire equipment. All [ r esearch and d evelopment] and SE costs related to a piece of equipment which were [sic] required to c reate that equipment. 44. Cos ts rela ted to equipment sold through a sales

- type lease were not included in Xerox ’ s COGS calculations f or [Rep ort Year s ] 2 0 08 and 200 9. 45. [The Comptroller Parties] failed to prove that 30% of Xerox ’ s total revenue is greater than Xerox ’ s COGS for [Repor t Ye ar] 200 9.7

The trial court issued the following conclusions of la w :

47. Based on the anal ysis in FAS 13 and R ent

- A

- Center [ v. Hegar ] , 468 S .W.3d 220 (Tex. App.

—

Austin 2015, no pet.), the re venue from Xerox ’ s sales

- type leases is properly classified as sale s re venue ( wholesale trade revenue) because the sales

- type leases are more like sales than leases. 48. For [Report Year ] 20 08, $7,605,175,730 was revenue from wholesale trade activities. The $7,605,17 5,730 is comprised of $3,320,550,884 [which] was related to cas h sales for equipment, supplies, and paper, $1,869,848,142 [which] was related to sales

- type lea ses for equipment on ly, $489,770,719 [ w hich] was related to financing revenue, and $2,006,360,936 [which] was related to sales of main tenance services. This rev enue wa s properly classified in Division F of the Standard Industrial Classification ( “ SIC ” ) Man ual, satisfying Tex. Tax Code § 171.00 0 1(18). 49. For [Re port Year] 2009, $8,354,317,373 was revenue from wholesale trade activities. The $8 ,354, 317,373 is compr ised of $3, 824,324,449 [w hich] was related to cash sales for equipment, supplies, and paper, $2,135 ,586,310 [which] was related to sales

- t ype leases for equipment only, $446,790,465 [which] was related to financing revenue, and $2,021,146,603 [which] was
r elat ed to s ales of maintenance services. This revenue was properly classified in Division F of the SIC Manual, satisfyi ng Tex. Tax Code § 7 1.0001(18). 50. For [R eport Year s ] 2008 and 2009, Xerox ’ s maintenance revenue is properly classified in Division F of the SIC Manual becaus e, as outlined in Division I, it is a specia liz ed service closely allied to activ ities covered in oth er divisions (Divi s ion F) and therefore, classified in such division. 51. F or [Report Year] 2008, 78.10% ($7,605,175,730/$9,737,522,675) of Xero x ’ s tot al revenue was from wholesale distribution activities, thereby satisfying Tex. Tax Code § 171.002(c)(1). 52. O f the $7,605,175,73 0 in revenue from wholesale trade activities, $1,381,255,637, or 18.16%, was wholesale trade revenue from products prod uced by Xer ox or a Xerox aff iliate, thereby satisfying Tex. Tax Code § 171.002(c)(2). 53. F or [Report Y ear] 2009, 79.49% ($ 8,354,317,373/$10, 5 10,116,487) of Xerox ’ s total revenue was from wholesa le distribution activities, thereby satisfying Tex. Tax Code § 17 1.00 2(c)(2)

.8

54. Of the $8,354,317,3 73 in revenue from wholesale trade activities, $1,236,709,444, or 14

. 80 %, was wholesal e trade revenue fr o m products produced by Xerox or a Xerox affiliate, thereby satisfying Tex. Tax Code § 171.002(c)(2). 55. Xerox did not prov ide retail or wholesale util ities, including telecommunications services, electricity, or gas, ther eby satisfying Tex. Tax Code § 171.002 ( c)(3). 56. By satisfying the requirements out lined in Tex. Tax Code § 171.002(c), Xerox properly used the 0.5% franchise tax rate fo r [Report Years] 2008 and 2009.

. . . 57. Xerox properly calculated and subtracted costs rela ted to the outl ined items in Tex. Tax Code § 171.1012(c). 58. Xerox properly calculated an d subtracted costs related to the outlined items in Tex. Tax Code § 17 1.10 12(f) a nd Comptroller Rule 3.588(f). 59. Xerox properly calculated and subtracted costs related to t he outlined ite ms in Tex. Tax Code § 1 71.1012(d). 60. Xerox ’ s mixed transaction co sts qualify for COGS under Comptroller Rule 3.588(c)(7)

. 61. Tax Code § 171.1012( k

- 1) is ina pplicable to Xerox. 62. For [Rep ort Year] 2008, under Tex. Tax Code § § 171. 101(a) and 171.101 2, [ the Comp troller Parties] have fai l ed to meet [their] burden of proof as a matter of law that Xerox ’ s COGS were less than 30% of Xerox ’ s total

revenue. 63. [ For Report Yea r 2009] Xerox ’ s total revenue multiplied by 30% was $3,201,418,233. As a matter of law, [ the Comp troller Part ies] have failed to meet [their] bur d e n of proof that 30% of Xerox ’ s total revenue is greater than Xerox ’ s COGS. II. I S SUES AND A NALYSIS

The Comptro ller Parties timely appealed the trial court ’s judgment

. The Sup re me C ourt of Texas o rde red this case transferre d to the Fourteenth Court of9

Appeals f rom the Third Co urt of A p peal s. 1 The Comptroller Parties present two issues on appeal. In thei r fi rst iss ue , they cha llenge the trial court ’ s take

- nothing judgment on their counterclaim . I n their second issue, they c hallenge the trial

c ourt ’ s rendition o f judgment in fav o r of Xero x on its claims against the Comptro l l e r P a r t i e s

. A

. Have the Comptr o ller Partie s sho wn that the trial c ourt erred in conclud ing that the 0 .5% franch ise

- tax rate applied to Xer ox during the Time Period at Issue ?
I n their seco nd i ssue, the Comptroller Parties assert that Xerox is not entitled
to the reduced franchise tax rat e allowed f or taxpayers “primarily engaged in retail or wholesale trade” because a majority of its revenue is from leasing equipment and providing services, n o t from the “sale” of goods

. During the Time Period at
Issue , there were two franchise tax ra tes: 1% and 0 .5 %. Se e Ac t o f Ma y 2 , 200 6 , ch. 1, § 2, 2006 Tex. Gen. Laws 1, 6

– 7 (codified at Tex. T ax Code § 17 1

. 00 2 )

. To qualify for the lower 0.5% rate, Xero x must h a ve been “primarily engaged in retail
or wholesale trade ” during the Time Period at Issue. See id

. Xer ox do es not contend that it was primari ly engaged in retail trade during t he Time Period at
Issue. Instead, Xero x contends, and the trial court found , tha t during the T ime
Period at issue , Xer o x was primari ly engaged in wh olesale trade.

For X erox to h ave been p rimaril y engaged in who lesale trade, among other things , the total revenue from its activities in wholesale trade must have been greater than the t o tal reve nue from its activities in trades other than the wholesale
trade

. Id

. The trial court foun d that i n Report Year 2008 and in Report Year 2009 ,

1 In trans f

er cases, the transferee court must decide the a ppeal in accordanc e w it h the precedent of t he trans fer or court under principles of stare decis is if the tra nsferee cou r t ’ s decision oth e rwise would have been inc on sistent with th e precedent of the trans feror court. Se e Tex. R. App. P. 4 1

. 3

.10

the total revenue from Xerox ’ s activities in wholesale trade was greater than the
total revenue from Xer o x ’ s acti vities in trades other than the wholesale trade

. During the Time Period at Issue, “who l esal e trade ” f or franchis e

- tax purposes

meant “ the activities described in Division F of the 1987 Stand ard Industrial Classification Manual published by the fe d eral Off ice of Management and Budget ” ( hereinafter , “D ivis ion F ” )

. Tex. Tax Code Ann. § 171. 000 1(18) (West, We stla w through 20 21 R. S .). Division F “ includes establishments or places of business primarily engaged in selling merch a ndise to retailers; to industrial, commercial, institutional, farm, construc tion contractors, o r professiona l business users; o r to other wholesalers

. . . . ” Division F does not contain a definition of “ selling. ” According to Xer ox, establishments sellin g merchandise to essentially anyone other than personal consumers are engaged in wholesale trade under Divisi on F. In
Conclu sion of Law 47 , t he trial cou rt determi ne d that the re venue from Xerox ’ s sales

- type leases under FAS 13 is properly classified as re v enue from sales falling within the scope of wholesale trade under Divi sion F. The Comptroller Parties

asser t that the trial cou rt err ed in conclud ing that the sa le s

- type leases should be
treated as sales

. The Comptroller Parties focus on the commo n meani n g of

“ selling ” under Divisi on F

. 1. S tandard o

f Review
We revie w the trial cou rt’s conclusions o f law de novo , and it s fin dings of
fact fo r sufficiency of the evidence. Hegar v. Am erican Multi

- Cinema, Inc. , 60 5
S.W. 3d 3 5 , 40 (Tex. 20 20 )

. When revi ewing the legal sufficiency of the evidence,
we consider the ev idence in the light most favorable to the challenged fi nding and indulge ever y reaso nable inference that would support it. City of Keller v. Wil son, 168 S.W. 3 d 802, 8 23 (Tex. 2005) . We must cre dit favorable evidence if a
reasonable factfinder could and dis regard contrary evidence unless a reasonab le11

factfinder could not. See id. at 827. We must determi ne whet her the evidence at
trial would enable reasonable and fair

- mi nded people t o find t he facts at
issue. See id. The factfinder is the only judge of witness credibility and the weight to give to te stimony. See id. at 81 9.

2. The Ordinary Meaning of “ selling ” a s u sed in Divisi on F
T he Legislature i ncorpor ated Division F into the Texas Tax C ode as the
definition of “ wholesale tr ade

. ” See Tex. Tax Co d e Ann. § 171. 0001(18)

. The Legis lat ure has not provided a statutory definition of “ sel ling. ” The parties do not

asser t that “s elli ng ” has a technical or partic ular meaning, and research has not revealed any Texas cases show ing that t his term has any such technical or particular meaning. In addition , no different, more limited, or precise definition of selling is apparent from the ter m’s use in th is statut ory con text

. See S tate v. $1,760.00 in U.S. Currency , 406 S.W.3d 177, 180 (Tex. 2 013) (per curiam)

. Th e refore , we construe the term “s el l ing ” based on its ordinary meaning. See
Am erican Multi

- Cinema, Inc. , 60 5 S.W. 3d at 4 1

– 42; City of San Antonio v. Hartma n, 201 S.W.3d 667, 672, n. 19 (Tex. 2006)

. The Comptrolle r Parties argue that the under the ordinary me aning of “selling
, ” selling takes place only when there is a transfer of title to property for a price. 2 The Comptroll er Parties ci te the Legislature ’s d efiniti on of “sale ” in article
2 of the Uniform Com mercial Code. See Tex. Bus. & C omm. C ode Ann. § 2.106(a) (We st, Westla w through 20 21 R. S .)

. Under this definition, a “sale ” consists in the passing of title from the sell er to the buy er for a price

. See id

. Xerox asserts that transfer or passing of title i s not necessary, and that this court should be

2 The Comptrolle r Part ies incorpor ate th e ir a rguments under the first issue as to the ordinary meaning of “ sold ” in Tax section 1 71. 1012(a) i nto their argume nts under the second issue as to the ordina ry meaning of “ selling ” in D i vision F

.12

guided by the statutory definition of “sale ” in t he Limited Sales, Excise, and Use
Tax Ac t , in w hich “sale ” is broadly defi ned to includ e the exchange, lease, or

ren tal of tangible personal proper ty. See Tex. Tax C ode Ann. § 151

. 005(2) (We st, Westla w through 20 21 R. S .)

. T he parties have not cited and research has not reveale d a case in w hich the
court dete rmines the meaning of “selling
, ” a s used in Divisi on F. The par ties have
not cited and researc h has not rev ealed a Texas case in which t he co urt determines
the ordina ry meaning of “ selling , ” “sold, ” or “ sale. ” In Am erican Multi

- Cinema,
Inc. , the Supr eme Court of Texas held tha t the ordinar y meaning of “sold ” as used
i n Tax section 171. 1012(a) requires a transfer , but the court did not spec ifically
determine what the or d inary meaning of “sold ” was in the conte xt of that case. See
Am erican Multi

- Cinema, Inc. , 60 5 S.W. 3d at 4 1

– 42

. Thus, the is sue of whether the
ord inary m eaning of “selling, ” “sold
, ” or “sale ” requires the transfe r or passage o f title appears to be an issue of first impression in Texas. The Legislature could have
defined “selling ” in this context as requiring the pa ssage of tit l e , as the Legislature
did in section 2.106(a) of the Business and Commerce Code , or the Legislature

co uld have defined “selling ” in this context as not requiring the passage of tit le , as the Legislature did in t he Limited Sales, Excise, and Us e Tax Ac t

. Se e Tex. Tax
C ode Ann. § 151

. 00 5(2) ; Tex. Tax C ode Ann. § 151

. 005(2)

. However, t he Legislature chose not to provid e an express definition of “se lling , ” and t he
definitions from other st at ute s cited by the parties do not purport to state the
ord inary meaning of “selli ng ” or “sale. ” I n th e cont ext of this case, the Legislature ’s failure to p r ovide a statutory d efinition of “selling ” requires us to
d etermine whether the ordinary meaning of the te rm “selling ” requires the transfer or passage of tit l e for “selling ” to occu r. See Am eric an Mult i

- Cinema, Inc. , 60 5
S.W. 3d at 4 1

–

42; Hartman, 201 S.W.3d at 672, n. 19

. A fter caref ul consideration,13

we conclude that ordinary meaning of “selling, ” “sold
, ” or “sale ” do es not require
the transfe r or passage of tit le , though it does requ ire the trans fer of the item being
sold

. See Am erican Multi

- Cinema, Inc. , 60 5 S.W. 3d at 4 1

– 42 ( holding that ordinary me aning of “sol d ” requires a tra nsfer and citing favor abl y definition s of “sold ” that do not require a transfer of t itle ) ; S ale , The Americ an Heritage D ictiona ry of the English Language (5th ed.) (defining “sale” as “an exchange of goods or services for an amount of mone y or its equivalent”) ; Sale , Bla ck ’s Law Dictionar y (11 th ed. 2019) (defi ning “sa le ” as “ [t]he transf er of property or title for a price ” ) (empha sis added) ; Transfer , Bla ck ’s Law Dictionar y (11 th ed. 2019) (defi ning “ transfer ” as “[a]ny mode of disposing of or parting with
an asset or an interest in an asset ” ) ; see also State v. Medina , 536 S.W.3d 528, 533 (Tex. App.

— San Antonio 2017, pet. r ef’d) ( holding, i n a criminal appeal, that the ordinary meaning of “sale” is “to give or agree to give something to som eone in exchange for money, i.e., transferring property from one person to another for a price ”). 3 Th erefore, we reject the Comptroller P arties ’ argument t hat Xerox ’ s sales

type l eases cannot fall within the scope of Divis io n F because these lease s do not
i nvolve any transfer of tit le.

3. The trial court ’s determination that revenue from Xerox ’s sale s - type l eases constitutes whole sale trade r e venu e . In Conclu sion of Law 47, t he trial cou rt determi ne d that the re venue from
Xerox ’ s sales

- type leases under FAS 13 is properly classified as re venue from
sales falling within the scope of wholesale trade under Divi s ion F. The Comptroller
Parties cont e nd that the trial court erred in making this conclu sion of law

.

3 The Comptroller Parties cite t he Third Co urt of App eal s ’ s o pinion in Hegar v. Sunstate Equ ip. Co., LLC

. See 578 S.W.3d 533 , 542

– 43 (Tex. App.

— Austin 2017 ) , a ff ’ d , 601 S.W .3d 685 ( Tex. 2020). T he court in that cas e d id n ot add ress the meaning of “ sellin g , ” “ sold , ” or “ sale. ” See id

.14

U nder Financial Accounti ng Standard 13, a sales

- type l e ase must satisfy one of the four criteria in Paragraph 7 and both of the criteria in Paragraph 8. T he criteria in Paragrap h 7 are:

a. T he leas e transfers ownership of the property to the lessee by the end of the lease term (as defin ed in paragraph 5(f)). b. The l ease contains a bargain purchase option (as defined in paragraph 5(d)). c. The lease term (a s defined in paragraph 5( f)) is equ a l to 75 percent
or more of the estimated economic life of the leased property (as defined in par agraph 5(g)). However, if the b eginning of the lease te rm falls within the last 25 percent of the total estimated economic l ife of the leased prope rty, includi n g earli er years of use, this criterion shall not be used for purposes of classifying the lease. d. The present value a t the be g inning of the lease term of the minimum lease payments (as defined in paragraph 5(j) )), exclu ding that portion of th e payments r e present ing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, i ncluding any profit the reon, e q uals or exceeds 90 percent of the excess of the fair value of the leased property (as defined in paragraph 5(c)) to the lessor a t the in ception of the lease over any related investment tax credit retained by the lessor and ex pected to be realized b y him. H owever, if the beginning of the lease term falls within the last 25 percent of the total esti mated economic life of the leased p r operty, including earlier years of use, this criterion shall not be used for purposes of classif

ying the lease. A lesso r shall compute the present value of the minimum lease payments using the interest rate implicit in t he lease (as defined in paragraph 5 ( k)). A lessee shall compute the present value of the minimum lease payments using his incrementa l borrowing rate (as de fined i n paragraph 5(1)), unless (i) it is practicable for him to learn the implicit rate computed by the lessor and (ii) th e imp licit r a te comp uted by the lessor is less than the lessee's incremental borrowing rate. If both of those conditions are met, th e lesse e shall use the implicit rate. The trial court found that Xerox’s sales

- type leases satisfied either Paragraph 7(c)

o r 7(d) above , and no party has challenged thi s finding on appeal. To constitute a15

sales

- type lease under FAS 13, a lease must also satisfy b oth of the following
criteria:

a. Collectibility of the minimum lease payments is reasonably predictable. A lessor s hall not be p reclude d from classifying a lease as a sales

- type lease or as a direct financing lease simply be cau se the receivable is subjec t to an estimate of uncollectibility based on experience with groups of similar receivables. b . No important uncertai nties surrou n d the a mount of unreimbursable costs yet to be incurred by the lessor under the lease. Important

un certainties might include c o mmitments by the lessor to guarantee performance of the leased property in a manner more exte nsive than the typical product warr a nty or to effectively protect the lessee from obsolescence of the leased property. However, the nec essity of estimating execut o ry costs such as insurance, maintenance, and taxes to be paid by the lessor (see paragraphs 1 7(a) and 18(a)) shall n ot by itself constit ute an important uncertainty as referred to herein. Th e trial court found that Xerox’s sa les

- type leases satisfied the f irst criterion , and
Xerox contends that the trial court ’s Finding of Fact 19 shows t hat its s ales

- type leases satisf

ied the seco n d crite rion

. The Comptroller Parties do not contend that
the sales

- type leases did not satisfy t he above t w o crit eria

. Under the terms of the sales

- type leases, unless the lessee exercises its opt ion to “purchase” the leased equipment, title to the le a s ed e qui pment remains

w ith Xe rox, and the lessee must return the equipment to Xerox at the end of the

term. The lessee may not cancel or terminate the lease and is responsible to pay all payments unde r the lease for the full term of the lease, which tri al e vide nce show ed
was for the useful life of the equipment

. T hough the lessees have the option to “purchase” the equipment at the end of the lease term, trial evidence showed that “[ m ]ost equipment is r eturned by lessees at or near the end of the contracted t erm ”

an d “[t] he equip ment is typically scrapped. I m ean, it has no value the way it is. ”16

Xerox relies upon t he Third Court of Appeals ’s opinion in Rent

- A

- Center, Inc. v. Hegar , and the Comptroller P artie s argue t hat th is ca se is not on point. See
468 S.W

. 3d 2 20, 22 2

– 25 (Tex. App.

— Austin 2015, no pet. )

. T he Rent

- A

- Center
court indicated that franchise

- tax conseq uences are based on the transaction’s
substance rather than its form and that the substance of various rent

- to

- own contracts were sales within the m eani ng of Di vision G of the 1987 S tandard
I ndustrial C lassification Manual incorporated into Tax Code section 171.0001(12)
for use in de termining whether the taxable entity was primaril y engaged in r etail
trad e unde r T exas Tax Code section 171.002(c)

. See id

. Non ethe less, t he facts in
Rent

- A

- Cent er were significan tly different fro m the facts in today ’ s case, and we presume that the Rent

- A

- Center case is not on po int. Courts must base their analysis on the substance, not the form of the
transaction. See G u lf C

hem ical & Metallurgical Corp. v. Hega r , 460 S.W.3d 743,
7 49

– 50 & n.10 (Tex. App.

— Austin 2015, no pet.). The Supreme Court of Texas
has instructed that in the area of tax law , courts should consid er the essence of the transaction, an d c ourts should not disr ega rd th e economic realities underlyin g the
transactions in issue. See C omb s v. Roark Amu sement & Vending, L.P. , 422
S.W.3d 632, 637 & n.14 (Tex. 2013) ; H.B. Aviation, LLC v. Hegar , No. 03

- 1 9

- 00414

- CV, 2020 W L 68 11993, at *7 ( Tex. A pp.

— Austin Nov. 20, 2020 , pet. filed) ( consider ing the economic realities of the transaction in determining whet her a sale
occurred under the use

- tax statute ) (mem. op.). Though the sales

- type leases stated that they were lease s and did not s tat e tha t they were sales, courts give effect t o the
substan c e of the tran sactions not the form. See Gulf Chemical & Metallurgical Corp. , 460 S.W.3d at 7 49

– 50 & n.10

. Th e trial court did not err in effectively c oncluding t hat the substance of
Xerox ’s sales

- ty pe le ases falls w ithin th e sco p e of Division F an d th us constitutes17

whol e s a l e trade under Tax Code sectio n 171.0001(18). See Tex. Tax Code Ann. §
171. 0001(18) ; Roark Amusement & Vending, L.P. , 422 S.W.3d at 637 & n.1 4 ; Gulf
Chemical & Metallurgical Corp. , 4 60 S.W.3d at 7 49

– 50 & n.10

. T he trial court did
not err in conclud i ng that it wa s proper to classi fy the re venue from Xerox ’ s sales

type leases under FAS 13 as re venue from sales falling within the scope of
wholesa le trade under Divi s ion F. 4 See T e x. Tax Code Ann. § 171. 0001(18) ; Roark
Amusement & Vending, L.P. , 422 S.W.3d at 637 & n.14 ; Gulf Chemical & Metallurgical C

orp. , 4 60 S.W.3d at 7 49

– 50 & n.10

. 4. The Comptroller Parti es ’ a rgu ment t hat Tax Code section 171

. 0 02(c)(1) is an exemption.
T he Comptrolle r Parties assert that we should strictly construe Tax Code
section 171. 00 2 ( c ) ( 1 ) a g a i n st Xerox b ecause this statute is t antamount to

an exemptio n

. Th e Sup reme Court of Texas has pre vio usly h eld that

tax exemption s m

ust be construed strictly because “they are the antithesis of equality and uniformity and because they place a greater burden on other taxpaying
businesses and i ndividuals.” Bullock v. Nat'l Bancshares Corp. , 584 S.W.2d 26 8,
272 (T ex. 1979) (c itation omit t ed). But Chapter 171 makes clear that Tax Code
section 171. 00 2 (c)(1) is not an exemptio n . The franchise tax is levied on a taxable entity ’ s “taxable margin.” Tex. Tax C ode Ann. § 17 1

. 00 2 . It is not a tax on

revenue. Sunstate Eq uip

. Co., LLC

. v. Heg ar , 601 S.W. 3 d 685 , 690 ( Tex. 2020). Tax Code section 171.002(c)(1) is part of the de termination of the applicable
franchise

- tax rate

. See Tex. Tax Code Ann. § 17 1

. 00 2

. Deter mining tha t a lower
franchise

- tax rate applies does not “exempt” or “de duc t” otherwise t axable

4 The Comptroller Parties c ite the Third Co urt of App eals ’ s opinion in Hegar v. Sunstate Equip. Co., LLC

. See 57 8 S.W.3d 53 3 , 542

– 43 (Tex. Ap p.

— Austin 2017), a ff ’ d , 60 1 S.W.3d 685 ( Te x. 2020). T he court in that c ase d id n ot add ress an y issue regarding sal es

- type leases under FAS 1 3

o r the scope of the defini tion of wholes ale trade

. See id

.18

amounts from taxation. See Sunstate Equip. Co., LLC

. , 601 S.W.3d at 690

. Instead,
the determination of the applicable franchise

- ta x rate is how the amount subject to
tax i s ascertained in the first place

. See Tex. Tax Code Ann. § 17 1

. 00 2 ; Su ns tate Equip. Co., L

L C

. , 601 S.W.3d at 690

. We conclude that Tax Code section
171. 00 2 (c)(1) is not tantamount to an exemptio n , and we do not str ictly construe the statute against Xer o x. See Su nstate Equip. Co., LLC

. , 601 S.W.3d at 690

. 5. The trial court ’s de te rmination th at th e total re ve nue from Xerox ’ s activities i n wholesale trade was gr eater than the total revenue f rom Xerox ’ s activi ties in trades other than the wholesale trades. The Comptr ol ler Parties ass ert that because no revenue from Xero x ’ s sales

ty p e leases cou ld prop e rly be considered revenue from activities in Division F , t he
trial court err ed b y (1) including the $1,869,848,142 and the $489,770,719
mentioned i n concl usions of law 48 as revenue from Xerox ’ s activities in wholesale trade for Rep ort Year 200 8 , a nd (2) i ncludin g the $2,135,586,310 and
the $446,790,465 mentioned in conclus ion of law 49 as revenue from Xerox ’s activities in wholesale trade for Report Year 200 9. As discussed ab ove, we conclude t hat the tr ial court did not err in consi der i ng revenue f rom Xer o x ’ s sal es

type leases as revenue from activities in Division F

. Theref o re , t he trial court did
not err in including these amounts as reve nues from Xerox ’s activities i n w holesale
trade

. The Comptroller Parties a lso assert that th e t r ial court er red in i n cludin g revenue related to maintenance service s as reve nues from Xerox ’s activities i n wholesale trade

. We presu me, without deciding th at the trial cou rt so erred for

ea ch of t he report years. Even under this presum ption, the Com ptr ol ler Parties have

not shown that the trial court erred in c on cluding for each report year that th e total

reve nue from Xerox ’s activities i n wholesale trade was gr eater than the total19

revenue f

rom Xerox ’s activi ties in trades other than the wholesale tr ade s

. Therefor e, we overr u le the Comptroller Partie s ’ second issue.

B. Have the Comp tr oller Parties sho wn that the trial evidence conclusively proved their e ntitl ement to judgment on the ir cou n te r claim?
In the ir first issue the Comptroller Pa rtie s assert tha t the cost

- of

- goods

- so l d
deduction in Tax Code section 171.1012 does not allow Xerox to dedu ct costs of leasing and renting office equipment to it s custom ers

— transactions that do not involve t he sale of good s

. The Comptroller Parti es contend that the tr ial court erred
in failin g to reduce Xerox’s COGS deduc tion

. See Tex. Tax Code Ann. § 171.101 2 (West, Westla w through 20 21 R. S .).

1. S tandard o

f Review
We revie w the trial cou rt’s conclusions of l aw de no vo , and it s fin di ngs of
fact for sufficiency of the e vid ence. Am erican Multi

- C i nema, Inc. , 60 5 S.W. 3d at 40

. The Comp troller Par t ies ’ f irst issue deal s with their counterclaim , as to whic h

t h e y had the burden of proof. See Queen v. RBG USA, Inc ., 4 95 S.W. 3 d 316, 322 (Tex. App.

— Houston [14th Dis t.] 2016, pet. de ni ed)

. The trial court found against
the Comptroller Parties on their counterclaim , and the Comptroller Parties have not argued that the trial evidence is factually insufficient to support any of the trial

court ’ s finding s of fact

. T herefore , on appeal the Comptroller Parties m ust demonstrate t hat the trial evidence conclusively established all fa cts nec essary to support their recovery on the countercl a im

. See Dow Ch em. Co. v. Francis , 46
S.W .3d 237, 241 (Tex. 2001)

. When revi ewing the legal sufficiency of the evidence, we consi der th e ev idence in the light most favorable to the challenged finding and ind ulge every reaso nable inference that would support it. City o f K eller

v. Wil son, 168 S. W.3 d 802, 8 23 (Tex. 2005) . We must cre dit favorable evidence if
a reasonable factfinder cou ld and dis regard contrary evidence unless a reasonable20

factfinder could not. S ee id. at 827. We mus t de termine whet her the evidence at
trial would enable reason abl e and fair

- mi nded peopl e t o find t he facts at
issue. See id. The factfinder is the only judge of witness credibility and the weight

to give t o te stimony. See id. a t 81 9.

2. F ranchi se - Tax Lia bility
We begin by o utl ining some general conce pts about fran c h ise

- t a x liability

. S ince 1893, Texas has impo sed a franchise tax on mos t d omestic and fore ign corporations op erating in this State. Am erican Multi

- Cinema, Inc. , 6 0 5 S.W .3d at 38

. These taxes “tax

. . . the value of th[e] privilege” to tra ns act business in Texas, which “confer s eco nomic benefits, incl udi ng the opportunity to r ea l ize gros s inc ome and the right to invoke the protection of local law.” Id. (quoting In re
Nestle USA , I

nc. , 387 S.W.3d 610, 612 (T e x. 2 012 ) )

. Determining a taxable entity’ s f ranchi se tax liability begin s wi th t he entit y’s

“ ‘total re venue,’ a figur e derived by adding together select amounts re port able as

gro ss income on a federal tax ret urn, subtracting bad debts and other items
included on the federal retur n, and excluding re ceipts ass ociated with various

tr ansa ctions.” Am erican Multi

- Cinema, Inc. , 60 5 S.W.3 d at 38 (quoting Graphic Packaging Corp. v. Heg ar , 538 S.W.3d 89, 93 (Tex. 2017) ). In Report Y ears 2008
and 20 09, a ta xable entity could s ubtrac t from total revenue the gre atest o f: (1) cost of goods sold ; (2) compensation a nd benefits paid to officers, dire ctor s, owner s, partners, and employees , subject to a cap; or (3) thirty perc ent o f total revenue. Ac t of May 2, 2006 , 79th Leg ., 3d C.S., ch. 1, § 4, sec. 17 1.101 , 2006 Tex . Gen. Laws 1, 8 (codif

ied at Tax Co de § 171.101(a)). In practice, the costs a t axabl e entity
chooses to subtract from total revenue dep end on its busin ess: sellers of goods ty pically subtract COGS, while service providers g enerally el ect to subt ract ei the r thirty percent of rev enues or compensa tion paid. See Tex. Tax Code Ann. §21

171. 101 2 ; Am erican Multi

- Cinema, Inc. , 60 5 S.W.3d at 38

. In their countercl aim the Comp tr oller Parties a lle g ed that during the T i me Period at Issue Xerox
overstated its COGS

. Th e C omptroller Parties alle ged that during each r eport y ear Xerox ’s COGS deduction should have been much less than the amount r e ported by
Xerox

. The Comptroller Par ties argued that for eac h repor t year the amount of
Xerox ’s COGS was less than thirty per cen t o f its total revenue

. 5 S ee A c t of May 2, 2006, 2 006 Tex. Gen. Laws at 8

. The provision governing the C OGS deduction defines “goods” as “real or tangible personal property sold in the ordinary c o urse of business of a taxable entity , ” and “ tangible p ersona l p roperty ” does not inclu de services. Tex. Tax Code
Ann. § 171.1012(a)(1) , (3) (We st, West la w thro ugh 20 21 R. S .). Generally, the
amount of the COGS deduction includes “all di r ect costs of acquiring or producing the goods,” id

. § 17 1.1012(c) , plus additional spec ified costs such as “ the costs of quality control , inc luding r eplacement of defective components purs uant to standard warranty policies ” id

. § 171.10 12(d) (9) , and limited administrative and
overhead costs , id

. § 1 71.1 012(f) , but does no t include other enumerated costs s uch
as “ distribution costs, including outbound transportat i on c o sts , ” id

. § 171 .1012(e) ; see Hegar v. Gulf Copper & Manufactur ing Corp. , 601 S.W.3d 66 8, 67 9 (Tex. 2020)

. A taxa

ble en tity may include a c ost in its COGS deduction only i f the

ta xable entity owns the goods it is selling

. Id

. § 171 .1012(i) ; Am er ican Multi

Cinema, Inc. , 60 5 S.W.3d at 41

.

5 Beca use the comp laints under the f ir st issue addr es s only the dedu c tion from t o tal reven ue, we need not address the other co mponent s of the formu la for c al culating fra n chise

- tax liab ility to

r es olv e these complaints.22

3. The Ordinary Meani ng of “ s old ” as used in Tax Code section 1 71. 1012(a)(1) For the pur

pos es of th e C OGS d eduction , “goods” are defined as “real or tangible personal property sol d in the ordinary co urse of business of a taxable entity

. ” Tex. Tax Code Ann. § 171.1012(a)(1)

. The Legis lat ure has not provided a

statutor y d efinition of “ s old

. ” Th e parties do not assert that “s old ” has a technical or particular meaning, and research has not revealed any Texas cases show ing that this term has any such te chnical or particular meaning. In addition , no different, more limited, or precise definition of “ sold ” is apparent from the term’s use in th is statutory context

. See $1,760.00 in U.S. Cur rency , 406 S.W.3d at 180

. Th e refore ,

we construe the term “s old ” ba sed on its ordinary meaning. See Am erican Multi

Cinema, Inc. , 60 5 S.W. 3 d a t 4 1

– 42; Hartman, 201 S .W.3d at 672, n. 19

. The Comptrolle r Parties assert that for franchise

- tax purposes, Xero x ’s
sales

- type lease s may not be co nsider ed “ sales ” and the property s ubject to these leases may not b e considered “sold ” beca use there is no tr ansf er or passing of ti tle
under th ese leases

. The Comptroller Parties argue that under the ordinary me aning
of “s a le , ” a sale takes place only when there is a transfer of title to p roperty fo r a price. The Comptroller Par ties cite the Legislature ’s def ini tion of “sale ” in artic le 2
of the Uniform Com mercial Code. See Tex. Bus. & C omm. C ode Ann. § 2.106(a)

. Under this definition, a “sale ” consists in the passing of title from the selle r to the
b uyer for a price

. See id

. Xerox counters that transfer or pass in g of title i s not

neces sary, and that this court should be guided by the statutory definition of “sale ”
in t he Lim ited Sales, Excise, and Use Tax Ac t , in w hich “sale ” is broadly defin e d
to incl ude the exchange, lease, or rental of tangible personal prope r t y. See Tex. Tax
C ode An n. § 151

. 005(2)

.23

T he parties have not cited and research has not reveale d a case in w hich t he
court dete rmines the meaning of “s old , ” as used in Tax C ode sectio n 171.1012 (a)(1)

. The parties have not cited and researc h has not rev ea le d a Texas

case in which the co urt determines the ordina ry meaning of “ selling , ” “sold, ” or

“ sale. ” In Am erican Mul ti

- Cinema, Inc. , the Supr eme Court of Texas held that the ordinary m ea ning of “ sold ” as used in Tax section 171. 1012(a) (1) requires a transf er , but the court did not specifically determine what the or d inary meaning of “sold ” was in the conte xt of that case

. See Am erican Multi

- Cinema, Inc. , 60 5
S.W. 3d at 4 1

– 42

. Thus, the is su e of whet her the ordinary meaning of “selling, ” “sold
, ” or “sale ” requ ir es the transfe r or pass age of title appears to be an issue of first impression in Texas. The Legislature could hav e defined “s old ” in this context as requiring the passage of tit le , a s the Legi slature did in section 2.106(a) of the
Business and Commerce Co de , or the Legislature could have defined “s old ” in this

context as not requiring the passage of tit le , as the Leg islature did in t he Limited Sales, Excise, and Use Tax Ac t

. See Tex. T ax C ode A nn. § 151

. 005(2) ; Tex. Tax
C ode Ann. § 151

. 005(2)

. The Legisl at ure chose not to provid e an express definition of “s old , ” and t he definitions from other st at ute s cited by the par ties do not purport to state the ordinary meaning of “selling
, ” “sale
, ” or “ sol d. ” I n th e
cont ext of this case, the Legislature ’s failure to p r ovide a statutory d efi nition of
“s old ” requires us to d etermine whether the ordinary meaning of the te rm “s old ”

r equires the transfer or passage of tit le for property t o have been “ so ld

. ” See
Am erican Multi

- Cinema, Inc. , 60 5 S.W. 3d at 4 1

– 42; Hartman, 20 1 S.W.3d at 672,

n. 19

. A fter careful consideration, we conclude that ordinary meaning of “sold ” or “sale ” do es not require the transfe r or passage of title , though it does require the

t ransfer o f the item being sold

. See Am erican Multi

- Cinema, Inc. , 60 5 S .W

. 3d at 4 1

– 42 ( holding t hat ordinary me aning of “sol d ” requires a tra nsfer and citing24

favor abl y definition s of “sol d ” that do not require a transfer of title ) ; S ale , The
American Herit a ge Dictio nary of the English Language (5th ed.) (defining “sale”
as “a n exchange of goods or se rvices for an amount of mone y or its equivalent”) ; Sale , Bla ck ’s Law Dictionar y (11 th ed. 2 019) (defi ning “sa le ” as “ [t]he transfer of property or title for a p r ice ” ) (emp hasis added) ; Transfer , Bla ck ’s Law Dictionar y (11 th ed. 2019 ) (defi ning “ transfer ” as “[a]ny mode of disposing of or parting with
an asset or an interest in an asset ” ) ; see al so Medina , 536 S.W.3d at 533 (holding,
i n a criminal appeal, that the o rdinary m eaning of “sale” is “to give or agree to give something to so m e one in exchange for mon ey, i.e., transferring property from one person to another for a price ”). 6 Therefore, we r eject the Comptroller Parties ’ argument t hat Xero x ’s sales

- type lease s may not b e co nsider ed “ sales ” and the property subject to these leases m ay not b e considered “s old ” beca use there is no
transf er or passing of title under th ese leases

. Th e Comptroller Parties a lso rely on Tax C ode sectio n 171.1012( k

- 1 ) , which
allows thre e categori es of taxable entities to subtract as COGS the costs otherwis e allowed by section 171. 1012 “in relation to tangible personal property that the entity rents or leases in the ord inary course of business. ” Tex. Tax Code Ann. §
171. 1012(k

- 1 ) (West, W e stla w thr ough 20 21 R. S .) ; s ee Sunstate Equip. Co., LLC

. , 601 S.W.3d at 6 9 3

– 94. The Comp troller Parties assert that if the ordinary meaning of “sales” or “sold” covered all leases, the L egislat ure would not h ave needed to enact subsection (k

- 1 ). Though this may be a correct statement, the failure of a ll
leases to fall with in th e c ommon meaning of “sa les” or “sold” does not pre clude
sale

- type leases from falling within th is common meaning or pre vent a court from

6 The C omptroller Parties cite the Third C o urt of App eals ’ s opinion in H egar v. Sunstate Eq uip. Co., LLC

. See 578 S. W.3d 533 , 542

– 43 (Tex. App.

— Austin 2017), a ff ’ d , 601 S.W.3 d 685 ( Tex. 2020). T he court in that case d id n ot add r e ss th e meaning of “ selling , ” “ so ld , ” or “ sale. ” See id

.25

considering property leased under a sales

- type leas e to be “ sold ” under the
ordina ry meaning of sold as used in Tax C o d e section 171.1012(a)(1 )

. The Legislature did n ot sta te that an en tity o ther t han one of the three entities liste d in subsection (k

- 1 ) may not make a COGS deduction based on costs rel a ting t o
p roperty leased under sales

- type leases that fall within the c om mon meaning of

“ sold

. ” See Tex. Tax Code Ann. § 171. 1012(k

- 1 )

. The Legislature did not provide
that the taxable e ntities mentioned in subse ction (k

- 1 ) ar e the only entities that may

su btr act as COGS the costs allowed by section 171.1012 in relation to ta ng ible personal property that the entity rents or leases

. See id.

4

. The treatment of sales

- type leases a s sales.

Under the terms o f the sales

- type leases, unless the lessee exercises i ts option to “purchase” the leased equipment, title to the le ased equi pm ent always
remains with Xe rox, and the lessee must return the equipment to Xerox at the end
of the term. The less ee may not cancel or terminate the lease and is responsible to pay all pay ments under the lease for the full term of the lease, which tri al e vi dence
show ed was for th e useful life of the equipment

. T hough the lessees have the option to “purchase” the equip ment at the end o f the lease term, trial evidence
showed that “[ m ]ost e qui pment is returned by lessees at or near the end of the
contracted t er m ” and “[t] he equipment is typically scrapped. I m ean, it has no value the way it is. ”

Courts must base their an alysis on the sub stance, not the form of the
transaction. See Gulf Chem ica l & Me tallurgical Corp. , 460 S.W.3d at 7 49

– 50 &
n.10

. The Supreme C ou rt of Texas has instruc ted that in the area of tax law , courts should consider the essence of the transaction, an d c ourts should no t disregard the
economic realities underlyin g the tra nsac tions in issue. See Roark Amu se ment & Vending, L.P. , 4 22 S.W.3d at 637 & n.14 ; H.B. Aviation, LLC , 2020 W L 68 11993,26

at *7 ( consider ing the econ omic realities of the transaction in determining whet her
a sale occurre d un der t he use

- tax statute )

. Though the sales

- type leases stated that

t hey were lease s and did not state that they were sales, courts give effect t o the
substan c e of the tran sactions n ot the form. See G ulf Chemical & Metallurgical Corp. , 460 S.W.3d at 7 49

– 50 & n.1 0

. We conclude that property leased under a
sales

- type lease ma y be considered to be “ sold ” under the ordina ry meaning of sold
as used in Tax Co de section 171.1012(a)(1)

. 7 See Tex. Tax Code Ann. §
171. 10 12 ( a ) (1) ; Am erican Multi

- Cinema, Inc. , 60 5 S .W. 3 d at 4 1

– 42 ( holding that ordinary me aning of “sol d ” requires a tra ns fer and citing favor abl y definition s of “sold ” that do not require a transfer of title ) ; Roark Amusement & Vending, L.P. , 422 S.W.3d at 637 & n.14 ; Gu lf Ch emical & Metallurgical Corp. , 4 60 S.W.3d at
7 49

– 50 & n.10

. ; S al e , The American Heritag e Dictionary of the English Language (5th ed.) (defining “sale” as “an exchange of goods o r services for an amount of

mone y or its equivalent”) ; Sale , Bla ck ’s La w Di ction ar y (11 th ed. 2019) (defi ning
“sa le ” as “ [t]he transfer of pr op erty or title for a pri ce ” ) (emphasis added)

. Therefore, the trial court did not err to the ex tent it ruled that Xerox properly co uld
include costs related to sales

- type leases in its C OGS deduc tion during the Time
Period at Issue

.

7 Xerox re lies upon t he Third Court of A ppeals ’s opinion in Rent

- A

- Center, Inc. v. Heg ar , and the C omptroller Partie s argue t hat th is ca se is no t on point. See 468 S.W.3d at 22 2

– 25

. T he facts in Ren t

- A

- Cen t er were significan tly dif ferent fro m the facts in today ’ s ca se, and the Rent

- A

Center cas e did not involve any issue regarding the COGS deduction. Se e id

. W e presume that the Rent

- A

- C enter case is not on po int. The Comptroller Parties also cite the T hird Co urt of App eals ’ s opinion in Hegar v. Sunstate Equip. Co., L LC

. See 57 8 S.W.3d 533 , 542

– 4 3 (Tex. App.

— Austin 2017), a

ff ’ d , 601 S.W.3d 6 85 ( Tex. 2020 ). T he court in that case d id n ot add ress
an y issue regarding sales

- type lea ses under FAS 13 or th e scope of the defini tion of “sol d ” or “sal e

. ” See id

.27

5. The Comptroller Parti es ’ ar gument that Tax Code se ction 171. 1012 is an exemption.
T he Comptrolle r Parties assert that we should strictly construe Tax Code
section 171. 1012 a g a i n st Xerox b ecause this statute is t antamount to an exemptio n

. After the Comptroller Parties filed the ir b ri ef, t h e Sup reme Court o f Texas held
that Tax Code section 1 71. 1012 is not an exemptio n and should not be strictly

constru ed against the taxpayer , and we must follow this precedent

. See Sunstate Equip. Co., LLC

. , 601 S.W.3d at 690

. In a nother part of th ei r brief , the Comptroller
Pa rties indicate that the COGS deduction i s an exemption and that t herefore Xe r ox had the bu r den of clearly sh ow ing the portion of the costs related to the direc t costs

o f acquiring or producing goods that Xero x sells. The cases th at the Comptroller
Partie s cite in support of this proposition are not on point. Tax Code section
171. 1 012 is not an exemptio n , and Xero x did not have the burden of p roof as to the Compt roller Pa rties ’ counterclaim. See Sunstate Equip. Co., LLC

. , 601 S.W.3 d at 690 ; Queen , 495 S.W. 3 d at 322

. 6. The Comptroller Parties ’ challeng es to costs that Xero x included in its COGS deduct ion U nder their first i ss ue , the Comptr oller Parties make numero us specif ic challenge s to costs that they clai m Xero x improperly inclu de d in its COGS
deduction for the t wo report years. The Comptroller Parties assert challenges on
th e grounds that (1) som e costs are based on leased or rented equ ipment ; (2) some
costs a re rela te d to services ; (3) some costs are delivery a nd o utbound

trans po rtation cos ts ; and (4) Xerox ’ s costs related to research and development , experimental engineerin g, and design activiti e s did n ot di stinguish between leased equipment and sold equipmen t.28

Cha ll e nges based on leased equip ment as to Report Year 2008

The Co mp tro ller Parties ch alleng e $5,032,896 in “ service part s c os ts related
to the technical service of equipment that is in re ntal status ” on Lin e 1 14 of
Defendant ’ s Ex hibit 19

. 8 Robert Hoyt , o ne of Xerox ’s tax con su ltants, testified that
these cost s “ related to equipment that was prov ided under sales

- type leases

. ” The
Co mptro ller Parties allege that Xerox improperly included the se costs in its COGS
de duction for Report Year 2008 because the costs re lated to rented equipment

. Based on our conclusions in sectio n II. B. 4. above, it woul d have been proper for
Xerox to hav e includ ed costs related to sales

- ty pe leases

. A fter examining the trial
evidence u nder the ap plica b le standard of review, we conclude that the Comptroller Parti es have not shown that they conclu si vely proved the amount , if any, of these costs that related to equi pment that was provided under l eases that

were not sal es

- type leases

. See Dow Chem. Co. , 46 S.W .3d at 241 ; Queen , 495
S.W. 3 d a t 322 ; Bethel v. B utler Drilling Co. , 635 S.W.2d 83 4 , 844 (Te x. App.

— Houston [14th Dist .] 1982, writ ref ’d n.r.e.)

. T he Co mptrolle r Parties have not
shown that i t would have been improper f or Xerox to include the se costs in its
COGS de duction for Report Ye ar 2008

. The Comptro ller Parties also ch allenge $4,619,37 0 in “[s]ervice parts cost
fo r equipment leased ” on Lin e 1 1 9 of Defendant ’ s Ex hibit 19

. We presume,
wit hout deciding, that the Comptroller Parti es have shown th at they conclusively
prove d that th ese costs were based on equi pment provided under leases that were
not sales

- type leases an d that it would have been improper for Xerox to have
included these c osts in its COGS de duction for Report Year 2008

.

8 Defendant ’s Exhibit 19 contain s a list of item s that Xerox in cluded in the calculat ion of the costs tha t should have been included in its COG S de duction for Rep ort Year 2008

.29

T he Comptroller Part ies also challenge the costs liste d on the following lines
of Defendant ’ s Ex hibit 19 : Lin e 14, L ine 26, Line 37, Line 56 , Li ne 109 , Line s 138

– 41 , Lines 169

– 72 , and Lines 194

– 96

. The Comptr olle r Parties asser t that
X erox improperly included the se costs in its COGS de duction for Report Year
2008 because the se costs rel ate to le ased equi pment. Based o n our conclusions in

sec tion II. B. 4. above, i t would have been proper for Xerox to hav e includ ed costs related to sales

- ty pe leases

. We p resu m e that some of the costs on each of th ese lines related to equi pm ent that was provided under leases that were no t sales

- type l eases

. A ft er examining the trial evidence u nder the ap plica b le standard of review

as to each of these com plaints , we conclude that the Comptroller Parti es have not
shown that they conclusively proved the amount of these costs that related t o equi pment that was provi ded under leases that were not sales

- type leases

. See Dow
Chem. Co. , 46 S. W .3d at 241 ; Queen , 4 95 S.W. 3 d at 322 ; Bethel , 635 S.W.2d at 844

. Cha lle nges based on leased equip me nt as to R eport Year 200 9 The Comptro ller Parties ch allen ge $ 2 , 889 , 737 in costs f or “ S ervice part s

c os ts related to the technical service of equipment that is in renta l status ” on Lin e 1 32 of Defendant ’ s Ex hibit 20

. 9 The Co mptro ller Parties allege that Xer ox imprope rly included the se costs in its COGS de duction for Report Yea r 200 9
bec ause Robert Hoyt, o ne of Xerox ’s tax con su ltants, agreed that these costs are costs of p roviding services to equipment that i s rented, and therefore that these
costs are not i ncludable

. The Com ptroller Parties as sert that Hoyt voice d this
agreeme nt wh en he answere d the following question at trial:

9 Defendant ’s Exhibit 20 c ontai n s a list of item s that Xerox included in the calculat ion of the costs tha t should have been included in its CO G S deduction for Rep ort Ye ar 200 9

.30

[Comptroller Parties ’ C ounsel]: And [Line] 132 is similar to the one we talked about last year, but it ’ s only related to stuff that ’ s rented. Do you agree with me today that that should not have been inc luded in t he direct line? [Hoy t]: Yes. I think that ’ s probably right. Xerox di d not stipulate o r ju dicially admit that Xerox improperly included
the se costs in its COGS de duction for Re port Year 200 9

. In testify ing about the
similar cost item on Line 11 4 o f Defendan t ’s Exhibit 19 , Hoy t testified that these

cost s “ related to equipment that was provid ed under sales

- type leases

. ” Based on

our conclusions in section II. B. 4. above, it would have been proper for Xerox to
hav e includ ed costs relate d to sales

- ty p e leases

. A fter examining the trial evidence

u nder the ap plica

b le standard of review , we conclu de that the Comptroller Parti es have not shown that they conclusively proved that it would have been improper for
Xerox to hav e included the costs on Line 132 of Defendant ’ s Ex hibit 20 in its
COGS de duction for Report Year 200 9. S ee Dow Chem. Co

. , 46 S.W .3d at 241 ; Queen , 495 S.W. 3 d a t 322

. The Comptro ller Parties also ch allenge $ 9 , 520 , 568 in “[s]ervice parts cost for equipment leased ” on Lin e 1 37 o f Defendant ’ s Ex hibit 20

. We presume, without deciding, that the Comptroller Parti es have shown th at they conclusively proved that these costs were based on equi pment provided under leases that were

not sales

- type leases and that it would have been imprope r for Xerox to have
incl uded these c osts in its COGS de duction for Report Year 200 9

. T he Comptroll er Part ies also challenge the costs liste d on Lines 23 , 55 , 79 , 127, 13 1, 1 53

– 56 , 177, 1 83

– 87 , 215

– 18, 22 4, 227 , 230, 236 , 2 52, 255

– 56, 258, 274, and 285 o f D efendant ’ s Ex hibit 20

. T h e Comptr ol ler Parties a llege that Xerox improperly included the se costs i n its COGS de duction for Report Year 2008
because the se costs rel ate to leased equipment. Based on our conclusions in section31

II. B. 4. above, it would hav e b een proper for Xerox to h av e includ ed costs related
to sales

- ty pe leases

. We p resu m e that some of the costs on each of th ese lines
related to equi pment that was provided under leases that were not sales

- type lease s

. A fter examining the tr ial evidence u nder the ap plica b le standard of review as to each of these complaints , we conclude that the Comptrolle r Parti es have not shown that they conclu sively proved the amount of t hese costs that related to equi pment that was provided under leases that were not sales

- type leases

. See Dow Che m. Co. , 46 S.W .3d at 241 ; Queen , 495 S.W. 3 d at 322 ; Bethel , 635 S.W.2d at 844

.

Cha lle nges based on costs re l ated to services The provision governing the C OGS deduction defines “goods” as “real or

t angible personal property sold i n the ordinary co urse of busi ness of a taxable entity

. ” Tex. Tax Code Ann. § 171.1012(a)(1) . The d efinition of “ tangible
p ersonal property ” specif ically excludes “services ” from the scope of the
defin ition. Tex. Tax Code An n. § 171.1012(a) (3)

. Generally, the amount of the
COGS d educt ion includes “all di rect costs of acquiring or producing the goods,”

p lus additional spec ified costs such as “ th e costs of quality control , inc luding

r eplacement of defective component s purs uant to standard warranty policies , i nspection directly alloc able to the production of goods, and repai rs and
maintenanc e of goods. ” Tex

. Tax Code Ann. § 171.1 012( c ) , § 171.1012(d) (9)

. A
taxable en tity may incl ude a cost in its COGS deduction only i f th e ta xable entity
owns th e goo ds it is selling

. Tex. Tax Code Ann. § 171.1012(i)

. U nder Comptroller
Rule 3.588 , i f a t ransaction contains elements of both a sale of tangible personal property an d a service , a taxable entity may only subt ract as cost of goods so ld th e costs otherwise allowed by Comptroller Rule 3.588 in relation to the tangible
per sonal property sold. See 34 T ex

. A dmin

. C ode § 3.588(c)(7). The Comptroller Parties assert that “re pair and ma intenance of goods ” under32

Tax se ction 171.1012( d) (9) inc ludes only “repair and maintenance of goo ds for
sale ” and d oes not include repair and maint ena nce of goods after the goods have
been sold . We presume, without deciding , that this is so. The Comptro ller Part ies ch allenge $ 4 , 835 , 57 2 in “ costs of sal e s app licab le
to service labor bi lled to non

- affiliated customers ” on Lin e 4 3 of Defendant ’ s Ex hibit 19

. The Comptroller Part ies also ch allenge $ 2 , 267 , 218 in “ costs of sal e s applicable to service labor bi ll ed to non

- affiliated customers ” on Lin e 6 0 of
Defendant ’ s Ex h ibit 20

. We presume, without deciding, that the Comptroller
Parti es ha ve shown th at they conclusively proved that (1) it would have been improper for Xerox to have included the costs o n Lin e 43 o f Defendant ’ s Ex hibit
19 in Xero x ’ s COGS de duction for R eport Year 2008 , and (2) it would have been improper for Xerox to have incl uded the costs on L ine 60 of Def end ant ’ s Exhibit
20 in Xero x ’s COGS de duction for Report Year 200 9. The Comptrolle r Part ies c h allenge $ 17 , 779 , 16 5 in costs on Lin e 55 of
Defendant ’ s Ex hib it 19 and $14,801 ,514 in costs on Line 78 of Defendant ’ s Exhibit 20. T he detailed description f or both lines i s the same: “ S ervice labor related to equipment insta lls and removals acco unted for a s Equipment Costs of
Sa le s [and for] service labor incur red d uring the warranty period

. ” The
Co mptro ller Parties allege that Xerox improperly included the se costs in its COGS
de duction for Report Year 2008 because the costs related to servi ces p rovided to
Xerox ’s customers. Xer ox argue s that these costs were se rvice and production

costs for replacement parts under wa rranty and related t o equipment that was held
out fo r sale by Xerox to its customers

. Xer ox con tends that it properly include d
these co sts unde r T ax Co de section 17 1.1012 (a)( 2 ), (c)(2), and (d )(9). A fter examining the trial evidence u nder the ap plica b le standard of review , we conclude that the Comptroller Parti es have not shown that they conclusively proved the33

amount of these costs th at were not quality

- contr ol cost s under T ax Co de section
171.1012 (d )(9). See Dow Chem. Co. , 46 S.W .3d at 241 ; Queen , 495 S.W. 3 d at 322 ; Bethel , 635 S.W.2d at 844

. T he Co mptrolle r Parties have not shown that it

wo uld have been improper for Xerox to h ave inc luded the se costs in its COGS
de duction

. T he Comptroller Par t ies c h alle nge $532,864,713 in costs o n Lin e 23 5 of
Defendant ’ s Ex hibit 19 and $5 23,557 ,961 in costs on Line 494 of Defend an t ’ s Exhibit 20. The detailed description f or both lines i s the same: “ S ervice labo r expenses for ‘ Sold ’ equipment

. ” The Co mptro ller Part ie s ass ert that Xerox improperly included the se costs in its COGS de duction b ecause the costs related to servi ces provided to Xerox ’s customers. Hoyt indic a ted at trial that “ sold equipment ” in this lin e in cludes equipment under sales

- type leases but does no t inc lude equipment under operating lea ses or rental agreements

. Xerox arg ue s that
these costs were labor costs directly related to the pro duction and acquisi tion of the equipment under T a x Co de sect ion 171.1012 ( c) and quality

- cont rol costs u nder
T ax C o de sect ion 171.1012 ( d ) (9). A fter examining the trial evidence u nder the

ap pli ca b le standard of review, we conclude that the Comptroller Parti es have not shown that they conclusively proved th e amount , i f any, of these costs that were not quality

- contr ol c ost s or direct costs of acquiring or p roducing goods

. See Tex.
Tax Code Ann. § 171.1012( c ) ; Tex. Tax Code Ann. § 171.1012( d ) (9) ; Dow Chem.
Co. , 46 S.W .3d at 241 ; Queen , 495 S.W. 3 d at 322 ; Bethel , 635 S.W.2d at 844

. T he
Co mptrolle r Parti es have not shown that it would have been improper for Xerox to have included the se costs in its COGS de duction

. The Comptroller Part ies ch allenge $ 1 5 , 542 , 301 in costs for “ [ s ] ervice labor

ex penses for Re ntal equipment ” o n Lin e 23 6 o f Defendant ’ s Ex hibit 19

. We
p resume, without deciding, that the Comptroller Parti es have shown th at they34

conclusively proved that they conclusively prov ed that (1) the costs on Lin e 236 of
Defendant ’ s Ex hibit 19 w ere based o n ser vices for equipment that wa s not “ sold ”
and th us di d no t fall within the definition of “ goods ” under Tax Code section
171.1012 (a)(1) , and (2) it would have been improper for Xerox to have included
these c osts in its COGS de duction for Repor t Year 200 8

. The Comptroller Part ies ch alle nge $ 79,469,630 in costs o n L in e 309 of
Defendant ’ s Ex hibit 20

. The det ailed description f or both l ines i s “ Labor s ervices purchased from outside agencies on a contract basis. This account is not to be used
for co nsulting se rvices. ” The Co mptro ller Parties a llege that Xerox impro perly
in cluded the se costs in its COGS de duction because the costs related to servi ces provided to Xerox ’s customers. H oyt testified that these costs were for
maintena nce and service l abor performed b y contractors hired by Xero x on equip ment , some of which was sol d and some of which w as rented

. Xerox argue s that these costs were labor costs directly related to the pro duction and acquisi tion of the equipment under T ax Co de section 171.1012 ( c)

. A fter exa mining the trial
evidence u nder the ap plica b le standard of re vie w, we conclude that the Comptroller Parti es have not shown that the y conclusively proved the amount , if
any, of these costs that were not quality

- contr ol costs or direct costs of ac quiring or

p roducing goods

. See Tex. Tax Co de Ann. § 171.1012( c ) ; T ex. T ax Code Ann. § 171.1012( d ) (9) ; Dow Chem. Co. , 46 S .W .3d at 241 ; Queen , 495 S.W. 3 d at 322 ; Bethel , 635 S.W.2d at 844

. T he Co mptrolle r Parties have not shown that it w ould
have been improper f

or Xerox to have included the se costs in its C OGS de duction

. The Comptro ller Parties ch allenge $ 2 5 , 182 , 625 in costs for “ services purchased which are not defined in account series 51508001

– 800 9, e.g., building of necessary items used in ma nufacturing on research projects ; surveys cond ucted by o utsid e agencies ” on Lin e 359 of Defen dant ’ s Ex hibit 20

. The Co mptro ller35

Par ties a llege that Xerox improperly included the se costs in its COGS de duction
because the costs related to servi ces provided t o Xerox ’s customers. Ho yt te stif ied
that these costs may incl ude research and development cos ts. Xerox a sserted in
Plaintiff ’ s Exhi bit 40 that these c osts were included in Xerox ’ s COGS deduction under Tax Code section 171.1012( c )(9). See Tex. Ta x Code Ann. § 171.1012( c)(9) ( “ costs attrib utable to research, expe rimen tal, engineering, and design a ctivities directly related to the produc tion of the goods, including all research or experimental expenditures described by Section 174, Internal Revenue Code ” ). On appeal, Xerox asserts that it was enti t le d to deduct these c ost s und er Tax Code
secti on 171 .101 2(c) and secti on 171 .1012( d ) (9). See Tex. T ax Code Ann. § 171.1012( c ) ; Tex. Tax Code Ann. § 171.1012( d ) (9)

. A fter examining the trial
evi dence u nder the ap plica b le standard of revi ew, we conclude that the Comp troller Parti es have not sh own that they conclusively proved the amount , if
any, of these costs that were not quality

- contr ol costs or direct costs of acquiring or
p roducing goods , or costs attri butable to research, experimenta l, engineering, and
desi gn ac tivities directly related t o the production of the goods

. See Dow Chem.
Co. , 46 S.W .3d at 241 ; Queen , 495 S.W. 3 d at 322

. Cha lle nges to alleged delivery and outb ound transportation cos ts

T he cost of good s sold under Tax Code se ction 171.1012 does not inclu de
distribution costs , incl uding outbound tra nsportation costs, in relation to the
taxab le entit y ’s goods. See Tex. Tax Code Ann. § 171.1012( e ) ( 3 ) (West, Westla w th rough 20 21 R. S .) ; H

egar v. Sunstate Equip. Co., LLC , 578 S.W.3d 533 , 54 0 (Tex. App.

—

Austin 2017), a

ff ’ d , 601 S.W.3d 685 ( Tex. 2020). The Comptroller
Par t ies ch all enge $ 128,218,732 in costs o n Lin e 121 of Defendant ’ s Ex hibit 19

. The description of this item in Defend a nt ’s Exhibit 19 and in Plaintiff ’s Exhibit 3936

is the sam e: “ M ETERED CONSUMABLES COST

. ” 10 In each exhibit there appears to be the beginning of an additio nal letter at the end of the description that
is cut off. The detailed descr iption of this i te m is “Cost from shipments of
consumables to metered customers. ” Hoy t tes tified at tri al that the account
descr iption was “Metered Consumables Cost of ” and was cut off. Ho yt testified that he did not think there was anything in the account description that indicated

t hat it was a cost of shipping. L ooking at the det ailed d escri pt ion , Hoyt admitted
that there was “some unclarity as it i s as to whether this is a cost of shipping or the
cost of the c o nsumables shipped. ” The Comptroller Par t ies also ch allenge $ 130 , 693 , 407 in costs o n Lin e 1 39 of
Defenda nt ’ s Ex hibit 20

. The des cript ion of this item in Defend ant ’s Exhibit 20 and
in Plaintiff ’s Exhibit 40 is the same: “ M ET ERED CONSUMABLES COST OF
S [sic]

. ” The detailed descr iption of this i tem is “Cost from shipment s of

consum ables to metered customers. ” Hoy t testified at tri al tha t he thinks Line 139 might be the cost of the consum ables themselves and not of the sh ipments o f the

co nsumables. The Co mptro ller Part ies allege that Xerox improperly included the se
costs i n its COGS de duction because the costs rela te to deli very or outbou nd

tr anspo rtation costs. A fter examining the trial evidence u nder the ap plica b le
standard of re view, we conclude that the Comptroller Parti es have not shown that they conclusively proved th at any of t he costs in Line 121 or L ine 13 9 were distribution cos ts or o utbound transportation costs. See Tex. Tax Code Ann. § 171.1012( e ) (2) ; Dow Chem. Co. , 46 S .W .3d at 241 ; Queen , 495 S.W. 3 d at 322 ; Bethel , 635 S.W.2d at 844

. T he Co mptrolle r Parti es hav e not shown that it would
have been imprope r for Xerox to have incl uded the se costs in its COGS de duction

.

10 Hoyt testif

ied that Plaintiff ’s Exh ibit 39 is the “comple te version of Defenda nts ’ Exhibit 19. ”37

The Comptroller Par t ies ch allenge $ 6 , 701 , 354 in costs o n Lin e 160 of
Defendant ’ s Ex hibit 19 and $5
, 345 , 422 in costs on Line 67 of Defend an t ’ s Exhibi t 20. The d etailed description f or both lin es i s the same: “ the cos t of expendable miscellaneous packaging and shipp ing supplies such as tapes, staples, decals, g lue,

etc. ” The Co mptro ller Part ies assert that Xerox improperly included the se costs in
its CO GS de ductio n because the costs relate to de li very or outbound trans po rta tion

costs. At trial, Hoyt disagreed that these costs wer e outbound transportation costs. Hoyt st ated that he viewed these costs as handling costs allowed under Tax Code
section 171.1 012(c )(4)

. See Tex. Tax Code Ann. § 171.1012( c ) ( 4 ) (West, Westla w through 20 21 R. S .) (stating that “ [t]he cost of goods sold in cludes all dir ect costs of acquiring or producing the goods, including . . . handling costs, including costs
attributa b l e to pro cessing , assembling, re packaging ” ). A fter exami ning the trial
evidence u nder the ap plica b le standard of review, we conclude that the Comptroll er Parti es have not shown that they conclusively proved that any of the
costs in Line 1 60 or L ine 67 were distribution cos ts or outbound transportation

costs. Se e Tex

. Tax Code Ann. § 171.1012( e ) (2) ; Dow Chem. Co. , 46 S.W .3d at
241 ; Queen , 495 S.W. 3 d at 32 2 ; Bethel , 635 S.W.2d at 844

. T he Co mptrolle r Parti es have not shown that it would have been i mproper for Xerox to have
included the se co sts in its COGS de ductio n

.

C ha lle nges to researc h and devel opment costs T he cost of goods sold under Tax Code section 171.1012 in cludes all direct costs of acquiring or producing the goods, including “ costs attri butable to research, experimental, engineer ing, and design activiti es di rectly related to the production of the goods, including all research or experimental expe nditures described by Section 174, Internal Revenue Code

. ” See Tex. Tax Code Ann. § 171.1012( c ) ( 9 )

. T he Comptrol ler Par t ies ch allenge $ 48 , 505 , 17 3 in costs o n Lin e 2438

of Defe ndant ’ s Ex hibit 19 and $ 42 , 989 , 083 in costs on Line 21 of Defend an t ’ s Exhibit 20. The deta iled description f or both lines i s the same: “ R&D related material expenditur es

. ” The Comptrol ler Parties complain that these costs relat e to equipment that is l eased as well as equi pment that i s sold. The Comptroller Parties
sugges t that the costs attrib utable to research, experimental, engineering, and design activities directly related to the p roduction o f equipment that is lea sed
shoul d not ha ve been included in X erox ’ s COGS deduction. Hoyt testified at trial
that all of these costs should be included in Xero x ’ s COGS deduction. Hoyt
testified that researc h and d evelopment costs are not variab le per

- unit costs. According to Hoyt , r esea rch and development cos t s are incurred upfront, and often prior to any production , and a company incur s these costs to d etermine whether a product is feasible, whether the product works, whether it can be produced
effectivel y , and the best model for the pr od uct. Hoyt testified t hat w ithout researc h

- and

- developme nt costs, a company is not going to have any products produced that are either sold or provided under
sales

- type leases. Hoyt stated tha t all of these rese arch

- and

- de velopment costs we re related to th e items that Xerox sol d and that the fact that these costs may also be
related to items that wer e leased does not make them any less directly related to the products that Xero x sold. According to Hoyt, a ll of th e research and development
leads to the pro duction of all of the pr oduct s, including those that were sold. In finding of fact 43, the trial court found that trial test i mony established that

re search

- and

- development costs “ are not bifurcated by the type of distributio n agreement that is us ed by the customer to acquire equi pment

. ” In the find ing, the
trial court also found that all re search

- and

- development costs “ rela ted to a piece of equipment which [sic] were required to c reate that equipment. ” The Comptr oller
Parti es have not asserted o r shown th at the trial evidence is lega lly or factually39

ins ufficient to support finding of fact 43. A fter examining the trial evide nce u nder the ap plica

b le standard of revie w, we conclude that the Comptroller Parti es have

n ot shown th at they conclusively proved that any of these costs were not costs attributable to research, experimental, engineering, and design activities directly

re lated to the production of Xerox ’ s goods

. See Tex. Tax Code Ann. § 171.1012( c ) ( 9 ) ; Dow Chem. Co. , 46 S. W .3d at 241 ; Queen , 495 S.W. 3 d a t 322 ; Bethel , 635 S.W.2 d at 844

. T he Co mptrolle r Parties have not shown that it would
have been improper for Xer o x to ha ve included the se costs in its COGS de duction

. 7. The Comptroller Parties ’ f ailure to s how that they concl usively p r o ved the y were entitle d to recover on their co unter claim

For Report Year 2008, Xerox originally reported a t otal COGS deduction of $4,910, 835,415. During the litigat ion in the trial court below , Xerox reviewed its
COGS deduction calcu lation and determined that its t otal COGS d e duction for Report Year 2008 should have been $5,994,240,999. In their counterclai m, the
Co mptroller Parties alleged that Xerox ’s total COGS deduction f or Report Year
2008 should have been much less tha n $4,910,8 35,415 . T he Comptroller Parties argued that Xerox ’s COGS was less t han t h irty percent of its t otal reven ue of $10,04 0,814,565, which would be $3,012,244,369.50. The Comp troller Par t ies had the burden of proving their ent itl ement to relief on t heir counterc laim

. See Q ueen , 495 S.W. 3 d at 322

. The tri al court found against t he Co mptroller Parties on their
counterclaim , and therefore on appeal they must demonstrate t hat the trial evidence conclusively established their entitlement to recovery on the ir countercl a im

. See D ow Chem. Co. , 46 S.W .3d at 241

. As to Report Year 2008 , we ha ve presumed th e Comptroller Parties ’ complaints have merit as to the following three
ite ms: (1) $4,619,370 in costs fro m Lin e 1 1 9 of Defendant ’ s Ex hibit 19 , (2) $ 4 , 835 , 572 in costs fro m Lin e 4 3 o f Defendant ’ s Ex hibit 19 , and (3 ) $ 1 5 , 542 , 30140

in costs f rom L in e 23 6 o f Defendant ’ s Ex hibit 19

. The sum of these t hree li nes is $24, 997,243. We have concluded that all of the Comptroller Parties ’ other

c omplaints as to Report Y ea r 2008 lack meri t. Even pre suming for the sa ke of argument that the Comptroller Par t ies ’ complaints as to these costs totaling approximately $25 million have merit, the Comptro ller Parties ha ve not shown that
the trial eviden ce c on clusively proves that Xerox ’s total COGS deduction f or Report Year 2008 should have been l ess tha n $4,910,83 5,415

. See Dow Chem.
Co. , 46 S.W .3d at 241 ; Queen , 495 S.W. 3 d at 322 ; Bethel , 635 S.W.2d at 8 44

.

For Report Year 200 9 , Xerox originally reported a t otal COGS deduction of $4,995,383
, 684

. D uring the l itigat ion in the trial court bel ow , Xerox reviewed its
C OGS d eduction calculation and determined that its t otal COGS de duction for Report Year 200 9 s hould have been $6,647,888,992

. In their counterclai m, the
Co mptroller Parties alleged that Xero x ’s total C OGS deduction f or Report Year
20 0 9 should have been much less

. The Comptroller Parties argued that Xerox ’s
COGS was less t han th irty percent of its t otal reven ue of $10,671,394,110
, which
would be $ 3, 201,418,233

. As to Report Year 200 9 , we have presumed th e Comptroller Parties ’ complaint s have merit as to the f ollow ing two items: (1) $ 9 , 520 , 568 in costs from Lin e 1 37 of Defendant ’ s Ex hibit 20 , and (2) $ 2 , 267 , 218
in costs fr om Lin e 6 0 of Defendant ’ s Ex hibit 20

. The sum of these two li nes is $ 11,78 7,786

. We h ave concluded that all of the Co mptroller Parties ’ other

c omp laints as to Report Y ea r 200 9 lack merit. Even presuming for the sa ke of argument that t he Comptroller Part ies ’ complaints as to these costs totaling approximately $ 12 million have mer it, the Com ptroller Parties ha ve not shown that
the trial eviden ce c on cl usively proves that Xerox ’s total COGS deduction f or Report Year 200 9 should have been l ess tha n $4,995,383
, 684

. See Dow Chem.
Co. , 46 S.W .3d at 241 ; Queen , 495 S.W. 3 d at 322 ; Bethel , 635 S.W.2d at 844

.41

The Comptr oller Parties have not shown that the tr ia l evidence conclusively proved their entitlement to recover on their counterclaim. W e ov errule the Comptroller Part ies ’ f

irst issue.

III. C ONC LUS I ON

T he Comptrol ler Parties hav e not shown that the trial court erred in

c on cluding for each repor t yea r that th e total reve nue from Xerox ’s activities i n wholesale trade was gr eater than the total revenu e f rom Xerox ’s activi ties in trades
other than the wholesale trades

. T he Comptrolle r Parties have not shown that th e trial co urt erred in d eterm ining that the applicable f ranchise ta x rate for Xerox during the Time Period at Issue wa s 0 .5 % rather than 1.0 %

. The Comptroller
Parties have not shown that the trial court erred in r endering a take

- nothing judgment as to thei r co untercla im. Accordin gly , we affir m the trial court ’ s jud gment.

/s/ Rand y Wilso n Just ice

Pan el co nsists of Justice s Zimme rer , Poissant , an d Wilson

.