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 STATE OF TEXAS, Appellants

V.

XEROX CORPORATION, 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 brought suit asserting that the franchise tax rate applicable to the entity 

during Report Years 2008 and 2009 was 0.5% rather than 1.0%. The Comptroller 
2

of Public Accounts of the State of Texas and the Attorney General of the State of 

Texas counterclaimed, asserting that the taxable entity’s cost-of-good-sold 

deduction should have been less than the amounts reported by the entity in each of 

these years. The trial court ruled in the taxable entity’s favor on its claims and 

ordered that the defendants take nothing on their counterclaims. On appeal, the 

defendants assert that the trial court erred in determining that the applicable 

franchise tax rate during the time period at issue was 0.5% rather than 1.0% and 

that the trial court erred in rendering a take-nothing judgment on their 

counterclaim. We affirm the trial court’s judgment.

I. FACTUAL AND PROCEDURAL BACKGROUND

Following an audit, appellant/defendant Glenn Hegar, the Comptroller of 

Public Accounts of the State of Texas (the “Comptroller”) determined that the 

applicable franchise tax rate for appellee/plaintiff Xerox Corporation for Report 

Years 2008 and 2009 (the “Time Period at Issue”) was 1.0% rather than 0.5%. 

Xerox had used the 0.5% tax rate to compute its franchise tax during the Time 

Period at Issue because Xerox contended that it was primarily engaged in 

wholesale trade under Texas Tax Code section 171.002(c) during this time period. 

The Comptroller disagreed with this contention. In June 2017, the Comptroller 

assessed more than $2.1 million against Xerox in franchise tax and interest for 

Report Year 2008 and more than $2.2 million in franchise tax and interest for 

Report Year 2009. Xerox paid the assessed amounts under protest and filed this 

suit under Chapters 112 and 171 of the Texas Tax Code to recover the disputed 

amounts.

Xerox sued the Comptroller and appellant/defendant Ken Paxton, Attorney 

General of the State of Texas (collectively, the “Comptroller Parties”). The 

Comptroller Parties filed a counterclaim against Xerox alleging that during the 
3

Time Period at Issue Xerox had overstated its cost of goods sold (“COGS”). The 

Comptroller Parties alleged that during each report year Xerox’s COGS deduction

should have been much less than the amount reported by Xerox. The Comptroller 

Parties argued that the amount of Xerox’s COGS was less than thirty percent of its 

total revenue for each report year.

The case proceeded to a bench trial at which three witnesses testified and 

documentary evidence was admitted. The trial court rendered judgment in favor of 

Xerox and against the Comptroller Parties. The trial court ordered the Comptroller 

Parties to issue one or more refund warrants to Xerox in the amount of $4,349,568, 

the total amount that Xerox had paid under protest for Time Period at Issue. The 

trial court also ordered the Comptroller Parties to pay statutory interest on that 

amount under Chapter 112 of the Texas Tax Code. The trial court ordered that the 

Comptroller Parties take nothing on their counterclaim.

The trial court issued forty-six findings of fact, including the following:

1. Xerox is primarily engaged in the retail and wholesale distribution of highend printing and publishing systems, digital multifunctional divisions, digital 

copiers, laser and solid ink printers, fax machines, document management 

software, and supplies such 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 involved the use of 

lease contracts.

. . .

10.During the period at issue, Xerox offered a variety of distribution 

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 arrangements.

11.All of Xerox’s equipment was available for sale in the ordinary course of 

business for customers to acquire through a purchase agreement, sales-type 

lease, operating lease, rental agreement, or bundled arrangement.
4

12.Under purchase agreements, customers took title to the equipment, bore the 

risk 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 terminated), bore the risk of loss on the

equipment, and insured the equipment.

14.Xerox examined its sales-type leases 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-type leases were generally for the 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 remain at the end of the lease term 

to ensure that 90 percent of fair value is covered during the lease term.

17.Xerox’s sales-type leases satisfied subparagraphs c and/or d of Paragraph 7 

of FAS 13.

18.The collectability of the minimum lease payments is reasonably predictable

because Xerox ensured the lease agreements included non-cancelable 

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 practices.

20.Under an operating lease, customers were required to make all 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 operating lease was less 

than the useful 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, Xerox’s rental agreements were not classified

as sales-type leases. . . 

22. A bundled arrangement allowed customers to contract for all their print

production needs (equipment, paper, toner, maintenance) in a single

agreement for a negotiated monthly price. Typically, these arrangements 

include an incremental, variable component for page volumes in excess of 
5

contractual page volume minimums, which are often expressed in terms of 

price per page.

23.Revenues under these arrangements were allocated based upon the estimated 

fair values of each element, considering the relative fair values of the lease, 

and non-lease deliverables included in the bundled arrangement. Lease 

deliverables included maintenance and executory costs, equipment, and 

financing, while non-lease deliverables generally consisted of supplies and 

non-maintenance services.

. . .

26.For [Report Year] 2008, Xerox had total revenues of $9,737,522,675. 

$3,320,550,884 was related to cash sales for equipment, supplies, and paper, 

$1,869,848,142 was related to sales-type leases for equipment only, 

$281,232,751 was related to operating leases, $2,006,360,936 was related to 

sales of maintenance services, $1,435,028,204 was related to sales of 

managed services (print production), $489,770,719 was related to financing 

revenue, and $334,731,039 was related to other training, licensing, and 

commission revenue.

27.For [Report Year] 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 related to sales-type leases for equipment only, $489,770,719 

[which] was related to financing revenue, and $2,006,360,936 [which] was 

related to sales of maintenance services. This revenue was properly 

classified in Division F of the Standard Industrial Classification (“SIC”)

Manual.

28.For [Report Year] 2008, 78.10% ($7,605,175,730/$9,737,522,675) of 

Xerox’s total revenue was from wholesale distribution activities.

. . .

31.For [Report Year] 2009, Xerox had total revenues of $10,510,116,487. 

$3,824,324,449 was related 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 operating leases, $2,021,146,603 was related to 

sales of maintenance services, $1,368,826,388 was related to sales of 

managed services (print production), $446,790,465 was related to financing 

revenue, and $376,643,167 was related to other training, licensing, and 

commission revenue.
6

32.For [Report Year] 2009, $8,354,317,373 was revenue from wholesale trade 

activities. The $8,354,317,373 is comprised of $3,824,324,449 [which] was 

related to cash sales for equipment, supplies, and paper, $2,135,586,310 

[which] was related to sales-type leases for equipment only, $446,790,465 

[which] was related to financing revenue, and $2,021,146,603 [which] was 

related to sales of maintenance services. This revenue was properly 

classified 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 wholesale trade activities.

. . .

37. For [Report Year] 2008, Xerox originally reported a [t]otal COGS 

subtraction of $4,910,835,415.

38.Costs of print production, services, and rentals were not included in Xerox’s

Texas COGS on its [Report Year] 2008 franchise tax return.

39.As requested by [the Comptroller Parties], Xerox reviewed and updated its 

COGS subtraction 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 originally reported a [t]otal COGS 

subtraction of $4,995,383,684.

41.Costs of print production, services, and rentals were not included in Xerox’s

Texas COGS on its [Report Year] 2009 franchise tax return.

42.As requested by [the Comptroller Parties], Xerox reviewed and updated its 

COGS subtraction calculation. Upon review, Xerox determined that its 

[t]otal COGS subtraction for [Report Year] 2009 should have been 

$6,647,888,992.

43.Testimony at trial established that [research and development] and Sustained

Engineering (“SE”) costs are not bifurcated by the type of distribution 

agreement that is used by the customer to acquire equipment. All [research 

and development] and SE costs related to a piece of equipment which were 

[sic] required to create that equipment.

44.Costs related to equipment sold through a sales-type lease were not included 

in Xerox’s COGS calculations for [Report Years] 2008 and 2009.

45.[The Comptroller Parties] failed to prove that 30% of Xerox’s total revenue 

is greater than Xerox’s COGS for [Report Year] 2009.
7

The trial court issued the following conclusions of law:

47.Based on the analysis in FAS 13 and Rent-A-Center [v. Hegar], 468 S.W.3d 

220 (Tex. App.—Austin 2015, no pet.), the revenue from Xerox’s sales-type 

leases is properly classified as sales revenue (wholesale trade revenue) 

because the sales-type leases are more like sales than leases.

48.For [Report Year] 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 related to sales-type leases for equipment only, $489,770,719 

[which] was related to financing revenue, and $2,006,360,936 [which] was 

related to sales of maintenance services. This revenue was properly 

classified in Division F of the Standard Industrial Classification (“SIC”)

Manual, satisfying Tex. Tax Code §171.0001(18).

49.For [Report Year] 2009, $8,354,317,373 was revenue from wholesale trade 

activities. The $8,354,317,373 is comprised of $3,824,324,449 [which] was 

related to cash sales for equipment, supplies, and paper, $2,135,586,310 

[which] was related to sales-type leases for equipment only, $446,790,465 

[which] was related to financing revenue, and $2,021,146,603 [which] was 

related to sales of maintenance services. This revenue was properly 

classified in Division F of the SIC Manual, satisfying Tex. Tax Code

§71.0001(18).

50.For [Report Years] 2008 and 2009, Xerox’s maintenance revenue is properly 

classified in Division F of the SIC Manual because, as outlined in Division I, 

it is a specialized service closely allied to activities covered in other 

divisions (Division F) and therefore, classified in such division.

51.For [Report Year] 2008, 78.10% ($7,605,175,730/$9,737,522,675) of 

Xerox’s total revenue was from wholesale distribution activities, thereby 

satisfying Tex. Tax Code § 171.002(c)(1).

52.Of the $7,605,175,730 in revenue from wholesale trade activities,

$1,381,255,637, or 18.16%, was wholesale trade revenue from products

produced by Xerox or a Xerox affiliate, thereby satisfying Tex. Tax Code

§171.002(c)(2).

53.For [Report Year] 2009, 79.49% ($8,354,317,373/$10,510,116,487) of 

Xerox’s total revenue was from wholesale distribution activities, thereby 

satisfying Tex. Tax Code § 171.002(c)(2).
8

54.Of the $8,354,317,373 in revenue from wholesale trade activities, 

$1,236,709,444, or 14.80%, was wholesale trade revenue from products 

produced by Xerox or a Xerox affiliate, thereby satisfying Tex. Tax Code

§171.002(c)(2).

55.Xerox did not provide retail or wholesale utilities, including 

telecommunications services, electricity, or gas, thereby satisfying Tex. Tax 

Code § 171.002(c)(3).

56.By satisfying the requirements outlined in Tex. Tax Code § 171.002(c), 

Xerox properly used the 0.5% franchise tax rate for [Report Years] 2008 and 

2009.

. . .

57.Xerox properly calculated and subtracted costs related to the outlined items 

in Tex. Tax Code § 171.1012(c).

58.Xerox properly calculated and subtracted costs related to the outlined items 

in Tex. Tax Code § 171.1012(f) and Comptroller Rule 3.588(f).

59.Xerox properly calculated and subtracted costs related to the outlined items 

in Tex. Tax Code § 171.1012(d).

60.Xerox’s mixed transaction costs qualify for COGS under Comptroller Rule

3.588(c)(7). 

61.Tax Code § 171.1012(k-1) is inapplicable to Xerox.

62.For [Report Year] 2008, under Tex. Tax Code §§ 171.101(a) and 171.1012,

[the Comptroller Parties] have failed 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 Year 2009] Xerox’s total revenue multiplied by 30% was 

$3,201,418,233. As a matter of law, [the Comptroller Parties] have failed to 

meet [their] burden of proof that 30% of Xerox’s total revenue is greater 

than Xerox’s COGS.

II. ISSUES AND ANALYSIS

The Comptroller Parties timely appealed the trial court’s judgment. The 

Supreme Court of Texas ordered this case transferred to the Fourteenth Court of 
9

Appeals from the Third Court of Appeals.1 The Comptroller Parties present two 

issues on appeal. In their first issue, they challenge the trial court’s take-nothing 

judgment on their counterclaim. In their second issue, they challenge the trial 

court’s rendition of judgment in favor of Xerox on its claims against the 

Comptroller Parties.

A. Have the Comptroller Parties shown that the trial court erred in 

concluding that the 0.5% franchise-tax rate applied to Xerox during the 

Time Period at Issue?

In their second issue, the Comptroller Parties assert that Xerox is not entitled 

to the reduced franchise tax rate allowed for taxpayers “primarily engaged in retail 

or wholesale trade” because a majority of its revenue is from leasing equipment

and providing services, not from the “sale” of goods. During the Time Period at 

Issue, there were two franchise tax rates: 1% and 0.5%. See Act of May 2, 2006, 

ch. 1, § 2, 2006 Tex. Gen. Laws 1, 6–7 (codified at Tex. Tax Code § 171.002). To 

qualify for the lower 0.5% rate, Xerox must have been “primarily engaged in retail 

or wholesale trade” during the Time Period at Issue. See id. Xerox does not 

contend that it was primarily engaged in retail trade during the Time Period at 

Issue. Instead, Xerox contends, and the trial court found, that during the Time 

Period at issue, Xerox was primarily engaged in wholesale trade. 

For Xerox to have been primarily engaged in wholesale trade, among other 

things, the total revenue from its activities in wholesale trade must have been 

greater than the total revenue from its activities in trades other than the wholesale 

trade. Id. The trial court found that in Report Year 2008 and in Report Year 2009,

1

In transfer cases, the transferee court must decide the appeal in accordance with the precedent 

of the transferor court under principles of stare decisis if the transferee court’s decision otherwise 

would have been inconsistent with the precedent of the transferor court. See Tex. R. App.

P. 41.3.
10

the total revenue from Xerox’s activities in wholesale trade was greater than the 

total revenue from Xerox’s activities in trades other than the wholesale trade.

During the Time Period at Issue, “wholesale trade” for franchise-tax purposes 

meant “the activities described in Division F of the 1987 Standard Industrial 

Classification Manual published by the federal Office of Management and Budget”

(hereinafter, “Division F”). Tex. Tax Code Ann. § 171.0001(18) (West, Westlaw

through 2021 R.S.). Division F “includes establishments or places of business

primarily engaged in selling merchandise to retailers; to industrial, commercial, 

institutional, farm, construction contractors, or professional business users; or to 

other wholesalers. . . .” Division F does not contain a definition of “selling.” 

According to Xerox, establishments selling merchandise to essentially anyone

other than personal consumers are engaged in wholesale trade under Division F. In 

Conclusion of Law 47, the trial court determined that the revenue from Xerox’s 

sales-type leases under FAS 13 is properly classified as revenue from sales falling 

within the scope of wholesale trade under Division F. The Comptroller Parties 

assert that the trial court erred in concluding that the sales-type leases should be 

treated as sales. The Comptroller Parties focus on the common meaning of 

“selling” under Division F.

1. Standard of Review

We review the trial court’s conclusions of law de novo, and its findings of 

fact for sufficiency of the evidence. Hegar v. American Multi-Cinema, Inc., 605

S.W.3d 35, 40 (Tex. 2020). When reviewing the legal sufficiency of the evidence, 

we consider the evidence in the light most favorable to the challenged finding and 

indulge every reasonable inference that would support it. City of Keller v.

Wilson, 168 S.W.3d 802, 823 (Tex. 2005). We must credit favorable evidence if a 

reasonable factfinder could and disregard contrary evidence unless a reasonable 
11

factfinder could not. See id. at 827. We must determine whether the evidence at 

trial would enable reasonable and fair-minded people to find the facts at 

issue. See id. The factfinder is the only judge of witness credibility and the weight 

to give to testimony. See id. at 819.

2. The Ordinary Meaning of “selling” as used in Division F

The Legislature incorporated Division F into the Texas Tax Code as the 

definition of “wholesale trade.” See Tex. Tax Code Ann. § 171.0001(18). The 

Legislature has not provided a statutory definition of “selling.” The parties do not 

assert that “selling” has a technical or particular meaning, and research has not 

revealed any Texas cases showing that this term has any such technical or 

particular meaning. In addition, no different, more limited, or precise definition of 

selling is apparent from the term’s use in this statutory context. See State v. 

$1,760.00 in U.S. Currency, 406 S.W.3d 177, 180 (Tex. 2013) (per curiam).

Therefore, we construe the term “selling” based on its ordinary meaning. See

American Multi-Cinema, Inc., 605 S.W.3d at 41–42; City of San Antonio v.

Hartman, 201 S.W.3d 667, 672, n. 19 (Tex. 2006).

The Comptroller Parties argue that the under the ordinary meaning of 

“selling,” selling takes place only when there is a transfer of title to property for a 

price.2 The Comptroller Parties cite the Legislature’s definition of “sale” in article 

2 of the Uniform Commercial Code. See Tex. Bus. & Comm. Code Ann. § 

2.106(a) (West, Westlaw through 2021 R.S.). Under this definition, a “sale” 

consists in the passing of title from the seller to the buyer for a price. See id. Xerox

asserts that transfer or passing of title is not necessary, and that this court should be 

2 The Comptroller Parties incorporate their arguments under the first issue as to the ordinary 

meaning of “sold” in Tax section 171.1012(a) into their arguments under the second issue as to 

the ordinary meaning of “selling” in Division F.
12

guided by the statutory definition of “sale” in the Limited Sales, Excise, and Use 

Tax Act, in which “sale” is broadly defined to include the exchange, lease, or 

rental of tangible personal property. See Tex. Tax Code Ann. § 151.005(2)

(West, Westlaw through 2021 R.S.).

The parties have not cited and research has not revealed a case in which the 

court determines the meaning of “selling,” as used in Division F. The parties have 

not cited and research has not revealed a Texas case in which the court determines 

the ordinary meaning of “selling,” “sold,” or “sale.” In American Multi-Cinema, 

Inc., the Supreme Court of Texas held that the ordinary meaning of “sold” as used 

in Tax section 171.1012(a) requires a transfer, but the court did not specifically 

determine what the ordinary meaning of “sold” was in the context of that case. See

American Multi-Cinema, Inc., 605 S.W.3d at 41–42. Thus, the issue of whether the 

ordinary meaning of “selling,” “sold,” or “sale” requires the transfer or passage of 

title appears to be an issue of first impression in Texas. The Legislature could have 

defined “selling” in this context as requiring the passage of title, as the Legislature 

did in section 2.106(a) of the Business and Commerce Code, or the Legislature 

could have defined “selling” in this context as not requiring the passage of title, as 

the Legislature did in the Limited Sales, Excise, and Use Tax Act. See Tex. Tax 

Code Ann. § 151.005(2); Tex. Tax Code Ann. § 151.005(2). However, the 

Legislature chose not to provide an express definition of “selling,” and the 

definitions from other statutes cited by the parties do not purport to state the 

ordinary meaning of “selling” or “sale.” In the context of this case, the 

Legislature’s failure to provide a statutory definition of “selling” requires us to 

determine whether the ordinary meaning of the term “selling” requires the transfer

or passage of title for “selling” to occur. See American Multi-Cinema, Inc., 605

S.W.3d at 41–42; Hartman, 201 S.W.3d at 672, n.19. After careful consideration, 
13

we conclude that ordinary meaning of “selling,” “sold,” or “sale” does not require

the transfer or passage of title, though it does require the transfer of the item being 

sold. See American Multi-Cinema, Inc., 605 S.W.3d at 41–42 (holding that

ordinary meaning of “sold” requires a transfer and citing favorably definitions of 

“sold” that do not require a transfer of title); Sale, The American 

Heritage Dictionary of the English Language (5th ed.) (defining “sale” as “an 

exchange of goods or services for an amount of money or its equivalent”); Sale,

Black’s Law Dictionary (11th ed. 2019) (defining “sale” as “[t]he transfer of 

property or title for a price”) (emphasis added); Transfer, Black’s Law Dictionary 

(11th ed. 2019) (defining “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. ref’d) (holding, in a criminal appeal, that the 

ordinary meaning of “sale” is “to give or agree to give something to someone in 

exchange for money, i.e., transferring property from one person to another for a 

price”).3 Therefore, we reject the Comptroller Parties’ argument that Xerox’s salestype leases cannot fall within the scope of Division F because these leases do not 

involve any transfer of title.

3. The trial court’s determination that revenue from Xerox’s sales-type 

leases constitutes wholesale trade revenue.

In Conclusion of Law 47, the trial court determined that the revenue from 

Xerox’s sales-type leases under FAS 13 is properly classified as revenue from 

sales falling within the scope of wholesale trade under Division F. The Comptroller 

Parties contend that the trial court erred in making this conclusion of law.

3 The Comptroller Parties cite the Third Court of Appeals’s opinion in Hegar v. Sunstate Equip.

Co., LLC. See 578 S.W.3d 533, 542–43 (Tex. App.—Austin 2017), aff’d, 601 S.W.3d 685 (Tex. 

2020). The court in that case did not address the meaning of “selling,” “sold,” or “sale.” See id.
14

Under Financial Accounting Standard 13, a sales-type lease must satisfy one 

of the four criteria in Paragraph 7 and both of the criteria in Paragraph 8. The 

criteria in Paragraph 7 are:

a. The lease transfers ownership of the property to the lessee by the 

end of the lease term (as defined in paragraph 5(f)).

b. The lease contains a bargain purchase option (as defined in 

paragraph 5(d)).

c. The lease term (as defined in paragraph 5(f)) is equal to 75 percent 

or more of the estimated economic life of the leased property (as 

defined in paragraph 5(g)). However, if the beginning of the lease 

term falls within the last 25 percent of the total estimated economic 

life of the leased property, including earlier years of use, this criterion 

shall not be used for purposes of classifying the lease.

d. The present value at the beginning of the lease term of the 

minimum lease payments (as defined in paragraph 5(j))), excluding 

that portion of the payments representing executory costs such as 

insurance, maintenance, and taxes to be paid by the lessor, including 

any profit thereon, equals or exceeds 90 percent of the excess of the 

fair value of the leased property (as defined in paragraph 5(c)) to the 

lessor at the inception of the lease over any related investment tax 

credit retained by the lessor and expected to be realized by him. 

However, if the beginning of the lease term falls within the last 25 

percent of the total estimated economic life of the leased property,

including earlier years of use, this criterion shall not be used for 

purposes of classifying the lease. A lessor shall compute the present 

value of the minimum lease payments using the interest rate implicit 

in the lease (as defined in paragraph 5(k)). A lessee shall compute the 

present value of the minimum lease payments using his incremental 

borrowing rate (as defined in paragraph 5(1)), unless (i) it is 

practicable for him to learn the implicit rate computed by the lessor 

and (ii) the implicit rate computed by the lessor is less than the 

lessee's incremental borrowing rate. If both of those conditions are 

met, the lessee shall use the implicit rate.

The trial court found that Xerox’s sales-type leases satisfied either Paragraph 7(c) 

or 7(d) above, and no party has challenged this finding on appeal. To constitute a 
15

sales-type lease under FAS 13, a lease must also satisfy both of the following 

criteria:

a. Collectibility of the minimum lease payments is reasonably 

predictable. A lessor shall not be precluded from classifying a lease as 

a sales-type lease or as a direct financing lease simply because the 

receivable is subject to an estimate of uncollectibility based on 

experience with groups of similar receivables.

b. No important uncertainties surround the amount of unreimbursable 

costs yet to be incurred by the lessor under the lease. Important

uncertainties might include commitments by the lessor to guarantee 

performance of the leased property in a manner more extensive than 

the typical product warranty or to effectively protect the lessee from 

obsolescence of the leased property. However, the necessity of 

estimating executory costs such as insurance, maintenance, and taxes 

to be paid by the lessor (see paragraphs 17(a) and 18(a)) shall not by 

itself constitute an important uncertainty as referred to herein.

The trial court found that Xerox’s sales-type leases satisfied the first criterion, and 

Xerox contends that the trial court’s Finding of Fact 19 shows that its sales-type 

leases satisfied the second criterion. The Comptroller Parties do not contend that 

the sales-type leases did not satisfy the above two criteria. 

Under the terms of the sales-type leases, unless the lessee exercises its 

option to “purchase” the leased equipment, title to the leased equipment remains 

with Xerox, 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 under the lease for the full term of the lease, which trial evidence showed

was for the useful life of the equipment. Though the lessees have the option to 

“purchase” the equipment at the end of the lease term, trial evidence showed that 

“[m]ost equipment is returned by lessees at or near the end of the contracted term”

and “[t]he equipment is typically scrapped. I mean, it has no value the way it is.”
16

Xerox relies upon the Third Court of Appeals’s opinion in Rent-A-Center, 

Inc. v. Hegar, and the Comptroller Parties argue that this case is not on point. See

468 S.W.3d 220, 222–25 (Tex. App.—Austin 2015, no pet.). The Rent-A-Center

court indicated that franchise-tax consequences 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 meaning of Division G of the 1987 Standard 

Industrial Classification Manual incorporated into Tax Code section 171.0001(12) 

for use in determining whether the taxable entity was primarily engaged in retail

trade under Texas Tax Code section 171.002(c). See id. Nonetheless, the facts in 

Rent-A-Center were significantly different from the facts in today’s case, and we 

presume that the Rent-A-Center case is not on point.

Courts must base their analysis on the substance, not the form of the 

transaction. See Gulf Chemical & Metallurgical Corp. v. Hegar, 460 S.W.3d 743, 

749–50 & n.10 (Tex. App.—Austin 2015, no pet.). The Supreme Court of Texas 

has instructed that in the area of tax law, courts should consider the essence of the

transaction, and courts should not disregard the economic realities underlying the 

transactions in issue. See Combs v. Roark Amusement & Vending, L.P., 422

S.W.3d 632, 637 & n.14 (Tex. 2013); H.B. Aviation, LLC v. Hegar, No. 03-19-

00414-CV, 2020 WL 6811993, at *7 (Tex. App.—Austin Nov. 20, 2020, pet. filed)

(considering the economic realities of the transaction in determining whether a sale 

occurred under the use-tax statute) (mem. op.). Though the sales-type leases stated 

that they were leases and did not state that they were sales, courts give effect to the 

substance of the transactions not the form. See Gulf Chemical & Metallurgical 

Corp., 460 S.W.3d at 749–50 & n.10.

The trial court did not err in effectively concluding that the substance of 

Xerox’s sales-type leases falls within the scope of Division F and thus constitutes
17

wholesale trade under Tax Code section 171.0001(18). See Tex. Tax Code Ann. §

171.0001(18); Roark Amusement & Vending, L.P., 422 S.W.3d at 637 & n.14; Gulf

Chemical & Metallurgical Corp., 460 S.W.3d at 749–50 & n.10. The trial court did 

not err in concluding that it was proper to classify the revenue from Xerox’s salestype leases under FAS 13 as revenue from sales falling within the scope of 

wholesale trade under Division F.4 See Tex. Tax Code Ann. § 171.0001(18); Roark

Amusement & Vending, L.P., 422 S.W.3d at 637 & n.14; Gulf Chemical & 

Metallurgical Corp., 460 S.W.3d at 749–50 & n.10.

4. The Comptroller Parties’ argument that Tax Code section 171.002(c)(1)

is an exemption.

The Comptroller Parties assert that we should strictly construe Tax Code 

section 171.002(c)(1) against Xerox because this statute is tantamount to 

an exemption. The Supreme Court of Texas has previously held that 

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

equality and uniformity and because they place a greater burden on other taxpaying 

businesses and individuals.” Bullock v. Nat'l Bancshares Corp., 584 S.W.2d 268,

272 (Tex. 1979) (citation omitted). But Chapter 171 makes clear that Tax Code 

section 171.002(c)(1) is not an exemption. The franchise tax is levied on a taxable 

entity’s “taxable margin.” Tex. Tax Code Ann. § 171.002. It is not a tax on 

revenue. Sunstate Equip. Co., LLC. v. Hegar, 601 S.W.3d 685, 690 (Tex. 2020).

Tax Code section 171.002(c)(1) is part of the determination of the applicable 

franchise-tax rate. See Tex. Tax Code Ann. § 171.002. Determining that a lower 

franchise-tax rate applies does not “exempt” or “deduct” otherwise taxable

4 The Comptroller Parties cite the Third Court of Appeals’s opinion in Hegar v. Sunstate Equip.

Co., LLC. See 578 S.W.3d 533, 542–43 (Tex. App.—Austin 2017), aff’d, 601 S.W.3d 685 (Tex. 

2020). The court in that case did not address any issue regarding sales-type leases under FAS 13 

or the scope of the definition of wholesale 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-tax rate is how the amount subject to 

tax is ascertained in the first place. See Tex. Tax Code Ann. § 171.002; Sunstate 

Equip. Co., LLC., 601 S.W.3d at 690. We conclude that Tax Code section

171.002(c)(1) is not tantamount to an exemption, and we do not strictly construe 

the statute against Xerox. See Sunstate Equip. Co., LLC., 601 S.W.3d at 690.

5. The trial court’s determination that the total revenue from Xerox’s 

activities in wholesale trade was greater than the total revenue from 

Xerox’s activities in trades other than the wholesale trades.

The Comptroller Parties assert that because no revenue from Xerox’s salestype leases could properly be considered revenue from activities in Division F, the 

trial court erred by (1) including the $1,869,848,142 and the $489,770,719

mentioned in conclusions of law 48 as revenue from Xerox’s activities in 

wholesale trade for Report Year 2008, and (2) including the $2,135,586,310 and 

the $446,790,465 mentioned in conclusion of law 49 as revenue from Xerox’s 

activities in wholesale trade for Report Year 2009. As discussed above, we 

conclude that the trial court did not err in considering revenue from Xerox’s salestype leases as revenue from activities in Division F. Therefore, the trial court did 

not err in including these amounts as revenues from Xerox’s activities in wholesale 

trade. 

The Comptroller Parties also assert that the trial court erred in including 

revenue related to maintenance services as revenues from Xerox’s activities in 

wholesale trade. We presume, without deciding that the trial court so erred for 

each of the report years. Even under this presumption, the Comptroller Parties have 

not shown that the trial court erred in concluding for each report year that the total 

revenue from Xerox’s activities in wholesale trade was greater than the total 
19

revenue from Xerox’s activities in trades other than the wholesale trades.

Therefore, we overrule the Comptroller Parties’ second issue.

B. Have the Comptroller Parties shown that the trial evidence conclusively

proved their entitlement to judgment on their counterclaim?

In their first issue the Comptroller Parties assert that the cost-of-goods-sold 

deduction in Tax Code section 171.1012 does not allow Xerox to deduct costs of 

leasing and renting office equipment to its customers—transactions that do not 

involve the sale of goods. The Comptroller Parties contend that the trial court erred 

in failing to reduce Xerox’s COGS deduction. See Tex. Tax Code Ann. § 171.1012

(West, Westlaw through 2021 R.S.).

1. Standard of Review

We review the trial court’s conclusions of law de novo, and its findings of 

fact for sufficiency of the evidence. American Multi-Cinema, Inc., 605 S.W.3d at 

40. The Comptroller Parties’ first issue deals with their counterclaim, as to which

they had the burden of proof. See Queen v. RBG USA, Inc., 495 S.W.3d 316, 322 

(Tex. App.—Houston [14th Dist.] 2016, pet. denied). 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 findings of fact. Therefore, on appeal the Comptroller Parties must 

demonstrate that the trial evidence conclusively established all facts necessary to 

support their recovery on the counterclaim. See Dow Chem. Co. v. Francis, 46

S.W.3d 237, 241 (Tex. 2001). When reviewing the legal sufficiency of the 

evidence, we consider the evidence in the light most favorable to the challenged 

finding and indulge every reasonable inference that would support it. City of Keller

v. Wilson, 168 S.W.3d 802, 823 (Tex. 2005). We must credit favorable evidence if 

a reasonable factfinder could and disregard contrary evidence unless a reasonable 
20

factfinder could not. See id. at 827. We must determine whether the evidence at 

trial would enable reasonable and fair-minded people to find the facts at 

issue. See id. The factfinder is the only judge of witness credibility and the weight 

to give to testimony. See id. at 819.

2. Franchise-Tax Liability

We begin by outlining some general concepts about franchise-tax liability. 

Since 1893, Texas has imposed a franchise tax on most domestic and foreign 

corporations operating in this State. American Multi-Cinema, Inc., 605 S.W.3d at

38. These taxes “tax . . . the value of th[e] privilege” to transact business in Texas, 

which “confers economic benefits, including the opportunity to realize gross 

income and the right to invoke the protection of local law.” Id. (quoting In re 

Nestle USA, Inc., 387 S.W.3d 610, 612 (Tex. 2012)).

Determining a taxable entity’s franchise tax liability begins with the entity’s 

“‘total revenue,’ a figure derived by adding together select amounts reportable as

gross income on a federal tax return, subtracting bad debts and other items

included on the federal return, and excluding receipts associated with various 

transactions.” American Multi-Cinema, Inc., 605 S.W.3d at 38 (quoting Graphic 

Packaging Corp. v. Hegar, 538 S.W.3d 89, 93 (Tex. 2017)). In Report Years 2008 

and 2009, a taxable entity could subtract from total revenue the greatest of: (1) cost 

of goods sold; (2) compensation and benefits paid to officers, directors, owners, 

partners, and employees, subject to a cap; or (3) thirty percent of total revenue. Act 

of May 2, 2006, 79th Leg., 3d C.S., ch. 1, § 4, sec. 171.101, 2006 Tex. Gen. Laws 

1, 8 (codified at Tax Code § 171.101(a)). In practice, the costs a taxable entity 

chooses to subtract from total revenue depend on its business: sellers of goods 

typically subtract COGS, while service providers generally elect to subtract either 

thirty percent of revenues or compensation paid. See Tex. Tax Code Ann. §
21

171.1012; American Multi-Cinema, Inc., 605 S.W.3d at 38. In their counterclaim 

the Comptroller Parties alleged that during the Time Period at Issue Xerox 

overstated its COGS. The Comptroller Parties alleged that during each report year

Xerox’s COGS deduction should have been much less than the amount reported by 

Xerox. The Comptroller Parties argued that for each report year the amount of 

Xerox’s COGS was less than thirty percent of its total revenue.

5 See Act of May 2,

2006, 2006 Tex. Gen. Laws at 8.

The provision governing the COGS deduction defines “goods” as “real or 

tangible personal property sold in the ordinary course of business of a taxable 

entity,” and “tangible personal property” does not include services. Tex. Tax Code

Ann. § 171.1012(a)(1),(3) (West, Westlaw through 2021 R.S.). Generally, the 

amount of the COGS deduction includes “all direct costs of acquiring or producing 

the goods,” id. § 171.1012(c), plus additional specified costs such as “the costs of 

quality control, including replacement of defective components pursuant to 

standard warranty policies” id. § 171.1012(d)(9), and limited administrative and 

overhead costs, id. § 171.1012(f), but does not include other enumerated costs such 

as “distribution costs, including outbound transportation costs,” id. § 171.1012(e);

see Hegar v. Gulf Copper & Manufacturing Corp., 601 S.W.3d 668, 679 (Tex.

2020). A taxable entity may include a cost in its COGS deduction only if the 

taxable entity owns the goods it is selling. Id. § 171.1012(i); American MultiCinema, Inc., 605 S.W.3d at 41. 

5 Because the complaints under the first issue address only the deduction from total revenue, we 

need not address the other components of the formula for calculating franchise-tax liability to 

resolve these complaints.
22

3. The Ordinary Meaning of “sold” as used in Tax Code section

171.1012(a)(1)

For the purposes of the COGS deduction, “goods” are defined as “real or 

tangible personal property sold in the ordinary course of business of a taxable 

entity.” Tex. Tax Code Ann. § 171.1012(a)(1). The Legislature has not provided a

statutory definition of “sold.” The parties do not assert that “sold” has a technical 

or particular meaning, and research has not revealed any Texas cases showing that 

this term has any such technical or particular meaning. In addition, no different, 

more limited, or precise definition of “sold” is apparent from the term’s use in this 

statutory context. See $1,760.00 in U.S. Currency, 406 S.W.3d at 180. Therefore, 

we construe the term “sold” based on its ordinary meaning. See American MultiCinema, Inc., 605 S.W.3d at 41–42; Hartman, 201 S.W.3d at 672, n. 19.

The Comptroller Parties assert that for franchise-tax purposes, Xerox’s

sales-type leases may not be considered “sales” and the property subject to these 

leases may not be considered “sold” because there is no transfer or passing of title 

under these leases. The Comptroller Parties argue that under the ordinary meaning 

of “sale,” a sale takes place only when there is a transfer of title to property for a 

price. The Comptroller Parties cite the Legislature’s definition of “sale” in article 2 

of the Uniform Commercial Code. See Tex. Bus. & Comm. Code Ann. § 2.106(a).

Under this definition, a “sale” consists in the passing of title from the seller to the 

buyer for a price. See id. Xerox counters that transfer or passing of title is not 

necessary, and that this court should be guided by the statutory definition of “sale” 

in the Limited Sales, Excise, and Use Tax Act, in which “sale” is broadly defined 

to include the exchange, lease, or rental of tangible personal property. See Tex. Tax 

Code Ann. § 151.005(2).
23

The parties have not cited and research has not revealed a case in which the 

court determines the meaning of “sold,” as used in Tax Code section

171.1012(a)(1). The parties have not cited and research has not revealed a Texas 

case in which the court determines the ordinary meaning of “selling,” “sold,” or 

“sale.” In American Multi-Cinema, Inc., the Supreme Court of Texas held that the 

ordinary meaning of “sold” as used in Tax section 171.1012(a)(1) requires a 

transfer, but the court did not specifically determine what the ordinary meaning of 

“sold” was in the context of that case. See American Multi-Cinema, Inc., 605

S.W.3d at 41–42. Thus, the issue of whether the ordinary meaning of “selling,” 

“sold,” or “sale” requires the transfer or passage of title appears to be an issue of 

first impression in Texas. The Legislature could have defined “sold” in this context 

as requiring the passage of title, as the Legislature did in section 2.106(a) of the 

Business and Commerce Code, or the Legislature could have defined “sold” in this 

context as not requiring the passage of title, as the Legislature did in the Limited 

Sales, Excise, and Use Tax Act. See Tex. Tax Code Ann. § 151.005(2); Tex. Tax 

Code Ann. § 151.005(2). The Legislature chose not to provide an express 

definition of “sold,” and the definitions from other statutes cited by the parties do 

not purport to state the ordinary meaning of “selling,” “sale,” or “sold.” In the 

context of this case, the Legislature’s failure to provide a statutory definition of

“sold” requires us to determine whether the ordinary meaning of the term “sold” 

requires the transfer or passage of title for property to have been “sold.” See

American Multi-Cinema, Inc., 605 S.W.3d at 41–42; Hartman, 201 S.W.3d at 672,

n. 19. After careful consideration, we conclude that ordinary meaning of “sold” or 

“sale” does not require the transfer or passage of title, though it does require the 

transfer of the item being sold. See American Multi-Cinema, Inc., 605 S.W.3d at 

41–42 (holding that ordinary meaning of “sold” requires a transfer and citing 
24

favorably definitions of “sold” that do not require a transfer of title); Sale, The 

American Heritage Dictionary of the English Language (5th ed.) (defining “sale” 

as “an exchange of goods or services for an amount of money or its equivalent”);

Sale, Black’s Law Dictionary (11th ed. 2019) (defining “sale” as “[t]he transfer of 

property or title for a price”) (emphasis added); Transfer, Black’s Law Dictionary 

(11th ed. 2019) (defining “transfer” as “[a]ny mode of disposing of or parting with 

an asset or an interest in an asset”); see also Medina, 536 S.W.3d at 533 (holding, 

in a criminal appeal, that the ordinary meaning of “sale” is “to give or agree to give 

something to someone in exchange for money, i.e., transferring property from one 

person to another for a price”).6 Therefore, we reject the Comptroller Parties’ 

argument that Xerox’s sales-type leases may not be considered “sales” and the 

property subject to these leases may not be considered “sold” because there is no 

transfer or passing of title under these leases.

The Comptroller Parties also rely on Tax Code section 171.1012(k-1), which 

allows three categories of taxable entities to subtract as COGS the costs otherwise 

allowed by section 171.1012 “in relation to tangible personal property that the 

entity rents or leases in the ordinary course of business.” Tex. Tax Code Ann. §

171.1012(k-1) (West, Westlaw through 2021 R.S.); see Sunstate Equip. Co., LLC., 

601 S.W.3d at 693–94. The Comptroller Parties assert that if the ordinary meaning 

of “sales” or “sold” covered all leases, the Legislature would not have needed to 

enact subsection (k-1). Though this may be a correct statement, the failure of all 

leases to fall within the common meaning of “sales” or “sold” does not preclude 

sale-type leases from falling within this common meaning or prevent a court from 

6 The Comptroller Parties cite the Third Court of Appeals’s opinion in Hegar v. Sunstate Equip.

Co., LLC. See 578 S.W.3d 533, 542–43 (Tex. App.—Austin 2017), aff’d, 601 S.W.3d 685 (Tex. 

2020). The court in that case did not address the meaning of “selling,” “sold,” or “sale.” See id.
25

considering property leased under a sales-type lease to be “sold” under the 

ordinary meaning of sold as used in Tax Code section 171.1012(a)(1). The 

Legislature did not state that an entity other than one of the three entities listed in 

subsection (k-1) may not make a COGS deduction based on costs relating to 

property leased under sales-type leases that fall within the common meaning of 

“sold.” See Tex. Tax Code Ann. § 171.1012(k-1). The Legislature did not provide 

that the taxable entities mentioned in subsection (k-1) are the only entities that may 

subtract as COGS the costs allowed by section 171.1012 in relation to tangible 

personal property that the entity rents or leases. See id.

4. The treatment of sales-type leases as sales.

Under the terms of the sales-type leases, unless the lessee exercises its 

option to “purchase” the leased equipment, title to the leased equipment always 

remains with Xerox, 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 under the lease for the full term of the lease, which trial evidence 

showed was for the useful life of the equipment. Though the lessees have the 

option to “purchase” the equipment at the end of the lease term, trial evidence 

showed that “[m]ost equipment is returned by lessees at or near the end of the 

contracted term” and “[t]he equipment is typically scrapped. I mean, it has no 

value the way it is.”

Courts must base their analysis on the substance, not the form of the 

transaction. See Gulf Chemical & Metallurgical Corp., 460 S.W.3d at 749–50 & 

n.10. The Supreme Court of Texas has instructed that in the area of tax law, courts 

should consider the essence of the transaction, and courts should not disregard the

economic realities underlying the transactions in issue. See Roark Amusement &

Vending, L.P., 422 S.W.3d at 637 & n.14; H.B. Aviation, LLC, 2020 WL 6811993, 
26

at *7 (considering the economic realities of the transaction in determining whether 

a sale occurred under the use-tax statute). Though the sales-type leases stated that

they were leases and did not state that they were sales, courts give effect to the 

substance of the transactions not the form. See Gulf Chemical & Metallurgical 

Corp., 460 S.W.3d at 749–50 & n.10. We conclude that property leased under a 

sales-type lease may be considered to be “sold” under the ordinary meaning of sold

as used in Tax Code section 171.1012(a)(1).

7 See Tex. Tax Code Ann. §

171.1012(a)(1); American Multi-Cinema, Inc., 605 S.W.3d at 41–42 (holding that

ordinary meaning of “sold” requires a transfer and citing favorably definitions of 

“sold” that do not require a transfer of title); Roark Amusement & Vending, L.P.,

422 S.W.3d at 637 & n.14; Gulf Chemical & Metallurgical Corp., 460 S.W.3d at 

749–50 & n.10.; Sale, The American Heritage Dictionary of the English Language 

(5th ed.) (defining “sale” as “an exchange of goods or services for an amount of 

money or its equivalent”); Sale, Black’s Law Dictionary (11th ed. 2019) (defining 

“sale” as “[t]he transfer of property or title for a price”) (emphasis added).

Therefore, the trial court did not err to the extent it ruled that Xerox properly could 

include costs related to sales-type leases in its COGS deduction during the Time 

Period at Issue.

7 Xerox relies upon the Third Court of Appeals’s opinion in Rent-A-Center, Inc. v. Hegar, and 

the Comptroller Parties argue that this case is not on point. See 468 S.W.3d at 222–25. The facts 

in Rent-A-Center were significantly different from the facts in today’s case, and the Rent-ACenter case did not involve any issue regarding the COGS deduction. See id. We presume that 

the Rent-A-Center case is not on point. The Comptroller Parties also cite the Third Court of 

Appeals’s opinion in Hegar v. Sunstate Equip. Co., LLC. See 578 S.W.3d 533, 542–43 (Tex. 

App.—Austin 2017), aff’d, 601 S.W.3d 685 (Tex. 2020). The court in that case did not address 

any issue regarding sales-type leases under FAS 13 or the scope of the definition of “sold” or 

“sale.” See id.
27

5. The Comptroller Parties’ argument that Tax Code section 171.1012

is an exemption.

The Comptroller Parties assert that we should strictly construe Tax Code 

section 171.1012 against Xerox because this statute is tantamount to an exemption. 

After the Comptroller Parties filed their brief, the Supreme Court of Texas held 

that Tax Code section 171.1012 is not an exemption and should not be strictly

construed against the taxpayer, and we must follow this precedent. See Sunstate

Equip. Co., LLC., 601 S.W.3d at 690. In another part of their brief, the Comptroller 

Parties indicate that the COGS deduction is an exemption and that therefore Xerox 

had the burden of clearly showing the portion of the costs related to the direct costs 

of acquiring or producing goods that Xerox sells. The cases that the Comptroller 

Parties cite in support of this proposition are not on point. Tax Code section

171.1012 is not an exemption, and Xerox did not have the burden of proof as to the

Comptroller Parties’ counterclaim. See Sunstate Equip. Co., LLC., 601 S.W.3d at 

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

6. The Comptroller Parties’ challenges to costs that Xerox included in 

its COGS deduction

Under their first issue, the Comptroller Parties make numerous specific 

challenges to costs that they claim Xerox improperly included in its COGS 

deduction for the two report years. The Comptroller Parties assert challenges on 

the grounds that (1) some costs are based on leased or rented equipment; (2) some 

costs are related to services; (3) some costs are delivery and outbound 

transportation costs; and (4) Xerox’s costs related to research and development, 

experimental engineering, and design activities did not distinguish between leased 

equipment and sold equipment.
28

Challenges based on leased equipment as to Report Year 2008

The Comptroller Parties challenge $5,032,896 in “service parts costs related 

to the technical service of equipment that is in rental status” on Line 114 of 

Defendant’s Exhibit 19.

8 Robert Hoyt, one of Xerox’s tax consultants, testified that 

these costs “related to equipment that was provided under sales-type leases.” The

Comptroller Parties allege that Xerox improperly included these costs in its COGS 

deduction for Report Year 2008 because the costs related to rented equipment.

Based on our conclusions in section II. B. 4. above, it would have been proper for 

Xerox to have included costs related to sales-type leases. After examining the trial 

evidence under the applicable standard of review, we conclude that the 

Comptroller Parties have not shown that they conclusively proved the amount, if 

any, of these costs that related to equipment that was provided under leases that 

were not sales-type leases. See Dow Chem. Co., 46 S.W.3d at 241; Queen, 495

S.W.3d at 322; Bethel v. Butler Drilling Co., 635 S.W.2d 834, 844 (Tex. App.—

Houston [14th Dist.] 1982, writ ref’d n.r.e.). The Comptroller Parties have not 

shown that it would have been improper for Xerox to include these costs in its 

COGS deduction for Report Year 2008.

The Comptroller Parties also challenge $4,619,370 in “[s]ervice parts cost 

for equipment leased” on Line 119 of Defendant’s Exhibit 19. We presume, 

without deciding, that the Comptroller Parties have shown that they conclusively 

proved that these costs were based on equipment provided under leases that were 

not sales-type leases and that it would have been improper for Xerox to have 

included these costs in its COGS deduction for Report Year 2008.

8 Defendant’s Exhibit 19 contains a list of items that Xerox included in the calculation of the 

costs that should have been included in its COGS deduction for Report Year 2008.
29

The Comptroller Parties also challenge the costs listed on the following lines 

of Defendant’s Exhibit 19: Line 14, Line 26, Line 37, Line 56, Line 109, Lines

138–41, Lines 169–72, and Lines 194–96. The Comptroller Parties assert that 

Xerox improperly included these costs in its COGS deduction for Report Year 

2008 because these costs relate to leased equipment. Based on our conclusions in 

section II. B. 4. above, it would have been proper for Xerox to have included costs 

related to sales-type leases. We presume that some of the costs on each of these 

lines related to equipment that was provided under leases that were not sales-type 

leases. After examining the trial evidence under the applicable standard of review

as to each of these complaints, we conclude that the Comptroller Parties have not 

shown that they conclusively proved the amount of these costs that related to 

equipment that was provided under leases that were not sales-type leases. See Dow

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

844.

Challenges based on leased equipment as to Report Year 2009

The Comptroller Parties challenge $2,889,737 in costs for “Service parts

costs related to the technical service of equipment that is in rental status” on Line 

132 of Defendant’s Exhibit 20.

9 The Comptroller Parties allege that Xerox 

improperly included these costs in its COGS deduction for Report Year 2009

because Robert Hoyt, one of Xerox’s tax consultants, agreed that these costs are 

costs of providing services to equipment that is rented, and therefore that these 

costs are not includable. The Comptroller Parties assert that Hoyt voiced this

agreement when he answered the following question at trial:

9 Defendant’s Exhibit 20 contains a list of items that Xerox included in the calculation of the 

costs that should have been included in its COGS deduction for Report Year 2009.
30

[Comptroller Parties’ Counsel]: 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 included 

in the direct line?

[Hoyt]: Yes. I think that’s probably right.

Xerox did not stipulate or judicially admit that Xerox improperly included 

these costs in its COGS deduction for Report Year 2009. In testifying about the 

similar cost item on Line 114 of Defendant’s Exhibit 19, Hoyt testified that these 

costs “related to equipment that was provided under sales-type leases.” Based on

our conclusions in section II. B. 4. above, it would have been proper for Xerox to 

have included costs related to sales-type leases. After examining the trial evidence 

under the applicable standard of review, we conclude that the Comptroller Parties 

have not shown that they conclusively proved that it would have been improper for 

Xerox to have included the costs on Line 132 of Defendant’s Exhibit 20 in its 

COGS deduction for Report Year 2009. See Dow Chem. Co., 46 S.W.3d at 241;

Queen, 495 S.W.3d at 322. 

The Comptroller Parties also challenge $9,520,568 in “[s]ervice parts cost 

for equipment leased” on Line 137 of Defendant’s Exhibit 20. We presume, 

without deciding, that the Comptroller Parties have shown that they conclusively 

proved that these costs were based on equipment provided under leases that were 

not sales-type leases and that it would have been improper for Xerox to have 

included these costs in its COGS deduction for Report Year 2009.

The Comptroller Parties also challenge the costs listed on Lines 23, 55, 79, 

127, 131, 153–56, 177, 183–87, 215–18, 224, 227, 230, 236, 252, 255–56, 258, 

274, and 285 of Defendant’s Exhibit 20. The Comptroller Parties allege that Xerox 

improperly included these costs in its COGS deduction for Report Year 2008

because these costs relate to leased equipment. Based on our conclusions in section
31

II. B. 4. above, it would have been proper for Xerox to have included costs related 

to sales-type leases. We presume that some of the costs on each of these lines 

related to equipment that was provided under leases that were not sales-type leases.

After examining the trial evidence under the applicable standard of review as to 

each of these complaints, we conclude that the Comptroller Parties have not shown 

that they conclusively proved the amount of these costs that related to equipment 

that was provided under leases that were not sales-type leases. See Dow Chem.

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

Challenges based on costs related to services

The provision governing the COGS deduction defines “goods” as “real or 

tangible personal property sold in the ordinary course of business of a taxable 

entity.” Tex. Tax Code Ann. § 171.1012(a)(1). The definition of “tangible 

personal property” specifically excludes “services” from the scope of the 

definition. Tex. Tax Code Ann. § 171.1012(a)(3). Generally, the amount of the 

COGS deduction includes “all direct costs of acquiring or producing the goods,”

plus additional specified costs such as “the costs of quality control, including 

replacement of defective components pursuant to standard warranty policies,

inspection directly allocable to the production of goods, and repairs and 

maintenance of goods.” Tex. Tax Code Ann. § 171.1012(c), § 171.1012(d)(9). A

taxable entity may include a cost in its COGS deduction only if the taxable entity 

owns the goods it is selling. Tex. Tax Code Ann. § 171.1012(i). Under Comptroller 

Rule 3.588, if a transaction contains elements of both a sale of tangible personal 

property and a service, a taxable entity may only subtract as cost of goods sold the 

costs otherwise allowed by Comptroller Rule 3.588 in relation to the tangible 

personal property sold. See 34 Tex. Admin. Code § 3.588(c)(7). 

The Comptroller Parties assert that “repair and maintenance of goods” under
32

Tax section 171.1012(d)(9) includes only “repair and maintenance of goods for 

sale” and does not include repair and maintenance of goods after the goods have 

been sold. We presume, without deciding, that this is so. 

The Comptroller Parties challenge $4,835,572 in “costs of sales applicable 

to service labor billed to non-affiliated customers” on Line 43 of Defendant’s 

Exhibit 19. The Comptroller Parties also challenge $2,267,218 in “costs of sales

applicable to service labor billed to non-affiliated customers” on Line 60 of 

Defendant’s Exhibit 20. We presume, without deciding, that the Comptroller 

Parties have shown that they conclusively proved that (1) it would have been 

improper for Xerox to have included the costs on Line 43 of Defendant’s Exhibit 

19 in Xerox’s COGS deduction for Report Year 2008, and (2) it would have been 

improper for Xerox to have included the costs on Line 60 of Defendant’s Exhibit 

20 in Xerox’s COGS deduction for Report Year 2009.

The Comptroller Parties challenge $17,779,165 in costs on Line 55 of 

Defendant’s Exhibit 19 and $14,801,514 in costs on Line 78 of Defendant’s 

Exhibit 20. The detailed description for both lines is the same: “Service labor 

related to equipment installs and removals accounted for as Equipment Costs of 

Sales [and for] service labor incurred during the warranty period.” The

Comptroller Parties allege that Xerox improperly included these costs in its COGS 

deduction for Report Year 2008 because the costs related to services provided to 

Xerox’s customers. Xerox argues that these costs were service and production 

costs for replacement parts under warranty and related to equipment that was held 

out for sale by Xerox to its customers. Xerox contends that it properly included 

these costs under Tax Code section 171.1012(a)(2), (c)(2), and (d)(9). After 

examining the trial evidence under the applicable standard of review, we conclude 

that the Comptroller Parties have not shown that they conclusively proved the 
33

amount of these costs that were not quality-control costs under Tax Code section

171.1012(d)(9). See Dow Chem. Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at 

322; Bethel, 635 S.W.2d at 844. The Comptroller Parties have not shown that it 

would have been improper for Xerox to have included these costs in its COGS 

deduction.

The Comptroller Parties challenge $532,864,713 in costs on Line 235 of 

Defendant’s Exhibit 19 and $523,557,961 in costs on Line 494 of Defendant’s 

Exhibit 20. The detailed description for both lines is the same: “Service labor 

expenses for ‘Sold’ equipment.” The Comptroller Parties assert that Xerox 

improperly included these costs in its COGS deduction because the costs related to 

services provided to Xerox’s customers. Hoyt indicated at trial that “sold 

equipment” in this line includes equipment under sales-type leases but does not 

include equipment under operating leases or rental agreements. Xerox argues that 

these costs were labor costs directly related to the production and acquisition of the 

equipment under Tax Code section 171.1012(c) and quality-control costs under

Tax Code section 171.1012(d)(9). After examining the trial evidence under the 

applicable standard of review, we conclude that the Comptroller Parties have not 

shown that they conclusively proved the amount, if any, of these costs that were

not quality-control costs or direct costs of acquiring or producing 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.3d at 322; Bethel, 635 S.W.2d at 844. The 

Comptroller Parties have not shown that it would have been improper for Xerox to 

have included these costs in its COGS deduction.

The Comptroller Parties challenge $15,542,301 in costs for “[s]ervice labor 

expenses for Rental equipment” on Line 236 of Defendant’s Exhibit 19. We 

presume, without deciding, that the Comptroller Parties have shown that they 
34

conclusively proved that they conclusively proved that (1) the costs on Line 236 of 

Defendant’s Exhibit 19 were based on services for equipment that was not “sold”

and thus did not 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 costs in its COGS deduction for Report Year 2008.

The Comptroller Parties challenge $79,469,630 in costs on Line 309 of 

Defendant’s Exhibit 20. The detailed description for both lines is “Labor services 

purchased from outside agencies on a contract basis. This account is not to be used 

for consulting services.” The Comptroller Parties allege that Xerox improperly

included these costs in its COGS deduction because the costs related to services 

provided to Xerox’s customers. Hoyt testified that these costs were for 

maintenance and service labor performed by contractors hired by Xerox on 

equipment, some of which was sold and some of which was rented. Xerox argues

that these costs were labor costs directly related to the production and acquisition 

of the equipment under Tax Code section 171.1012(c). After examining the trial 

evidence under the applicable standard of review, we conclude that the 

Comptroller Parties have not shown that they conclusively proved the amount, if 

any, of these costs that were not quality-control costs or direct costs of acquiring or 

producing 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.3d at 322; 

Bethel, 635 S.W.2d at 844. The Comptroller Parties have not shown that it would 

have been improper for Xerox to have included these costs in its COGS deduction.

The Comptroller Parties challenge $25,182,625 in costs for “services 

purchased which are not defined in account series 51508001– 8009, e.g., building 

of necessary items used in manufacturing on research projects; surveys conducted 

by outside agencies” on Line 359 of Defendant’s Exhibit 20. The Comptroller 
35

Parties allege that Xerox improperly included these costs in its COGS deduction 

because the costs related to services provided to Xerox’s customers. Hoyt testified 

that these costs may include research and development costs. Xerox asserted in

Plaintiff’s Exhibit 40 that these costs were included in Xerox’s COGS deduction

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

(“costs attributable to research, experimental, engineering, and design activities 

directly related to the production of the goods, including all research or 

experimental expenditures described by Section 174, Internal Revenue Code”). On 

appeal, Xerox asserts that it was entitled to deduct these costs under Tax Code

section 171.1012(c) and section 171.1012(d)(9). See Tex. Tax Code Ann. §

171.1012(c); Tex. Tax Code Ann. § 171.1012(d)(9). After examining the trial 

evidence under the applicable standard of review, we conclude that the

Comptroller Parties have not shown that they conclusively proved the amount, if 

any, of these costs that were not quality-control costs or direct costs of acquiring or 

producing goods, or costs attributable to research, experimental, engineering, and 

design activities directly related to the production of the goods. See Dow Chem.

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

Challenges to alleged delivery and outbound transportation costs

The cost of goods sold under Tax Code section 171.1012 does not include

distribution costs, including outbound transportation costs, in relation to the

taxable entity’s goods. See Tex. Tax Code Ann. § 171.1012(e)(3) (West, Westlaw

through 2021 R.S.); Hegar v. Sunstate Equip. Co., LLC, 578 S.W.3d 533, 540

(Tex. App.—Austin 2017), aff’d, 601 S.W.3d 685 (Tex. 2020). The Comptroller 

Parties challenge $128,218,732 in costs on Line 121 of Defendant’s Exhibit 19.

The description of this item in Defendant’s Exhibit 19 and in Plaintiff’s Exhibit 39
36

is the same: “METERED CONSUMABLES COST.”

10 In each exhibit there 

appears to be the beginning of an additional letter at the end of the description that 

is cut off. The detailed description of this item is “Cost from shipments of 

consumables to metered customers.” Hoyt testified at trial that the account 

description was “Metered Consumables Cost of” and was cut off. Hoyt testified 

that he did not think there was anything in the account description that indicated 

that it was a cost of shipping. Looking at the detailed description, Hoyt admitted 

that there was “some unclarity as it is as to whether this is a cost of shipping or the 

cost of the consumables shipped.”

The Comptroller Parties also challenge $130,693,407 in costs on Line 139 of 

Defendant’s Exhibit 20. The description of this item in Defendant’s Exhibit 20 and 

in Plaintiff’s Exhibit 40 is the same: “METERED CONSUMABLES COST OF 

S[sic].” The detailed description of this item is “Cost from shipments of 

consumables to metered customers.” Hoyt testified at trial that he thinks Line 139 

might be the cost of the consumables themselves and not of the shipments of the 

consumables. The Comptroller Parties allege that Xerox improperly included these 

costs in its COGS deduction because the costs relate to delivery or outbound 

transportation costs. After examining the trial evidence under the applicable 

standard of review, we conclude that the Comptroller Parties have not shown that 

they conclusively proved that any of the costs in Line 121 or Line 139 were 

distribution costs or outbound transportation costs. See Tex. Tax Code Ann. §

171.1012(e)(2); Dow Chem. Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at 322; 

Bethel, 635 S.W.2d at 844. The Comptroller Parties have not shown that it would 

have been improper for Xerox to have included these costs in its COGS deduction.

10 Hoyt testified that Plaintiff’s Exhibit 39 is the “complete version of Defendants’ Exhibit 19.”
37

The Comptroller Parties challenge $6,701,354 in costs on Line 160 of 

Defendant’s Exhibit 19 and $5,345,422 in costs on Line 67 of Defendant’s Exhibit 

20. The detailed description for both lines is the same: “the cost of expendable 

miscellaneous packaging and shipping supplies such as tapes, staples, decals, glue, 

etc.” The Comptroller Parties assert that Xerox improperly included these costs in 

its COGS deduction because the costs relate to delivery or outbound transportation 

costs. At trial, Hoyt disagreed that these costs were outbound transportation costs. 

Hoyt stated that he viewed these costs as handling costs allowed under Tax Code 

section 171.1012(c)(4). See Tex. Tax Code Ann. § 171.1012(c)(4) (West, Westlaw

through 2021 R.S.) (stating that “[t]he cost of goods sold includes all direct costs 

of acquiring or producing the goods, including . . . handling costs, including costs

attributable to processing, assembling, repackaging”). After examining the trial 

evidence under the applicable standard of review, we conclude that the 

Comptroller Parties have not shown that they conclusively proved that any of the

costs in Line 160 or Line 67 were distribution costs or outbound transportation 

costs. See Tex. Tax Code Ann. § 171.1012(e)(2); Dow Chem. Co., 46 S.W.3d at

241; Queen, 495 S.W.3d at 322; Bethel, 635 S.W.2d at 844. The Comptroller 

Parties have not shown that it would have been improper for Xerox to have 

included these costs in its COGS deduction.

Challenges to research and development costs

The cost of goods sold under Tax Code section 171.1012 includes all direct 

costs of acquiring or producing the goods, including “costs attributable to research, 

experimental, engineering, and design activities directly related to the production 

of the goods, including all research or experimental expenditures described 

by Section 174, Internal Revenue Code.” See Tex. Tax Code Ann. §

171.1012(c)(9). The Comptroller Parties challenge $48,505,173 in costs on Line 24
38

of Defendant’s Exhibit 19 and $42,989,083 in costs on Line 21 of Defendant’s 

Exhibit 20. The detailed description for both lines is the same: “R&D related 

material expenditures.” The Comptroller Parties complain that these costs relate to 

equipment that is leased as well as equipment that is sold. The Comptroller Parties 

suggest that the costs attributable to research, experimental, engineering, and 

design activities directly related to the production of equipment that is leased 

should not have been included in Xerox’s COGS deduction. Hoyt testified at trial 

that all of these costs should be included in Xerox’s COGS deduction. Hoyt 

testified that research and development costs are not variable per-unit costs. 

According to Hoyt, research and development costs are incurred upfront, and often

prior to any production, and a company incurs these costs to determine whether a

product is feasible, whether the product works, whether it can be produced

effectively, and the best model for the product.

Hoyt testified that without research-and-development costs, a company is 

not going to have any products produced that are either sold or provided under 

sales-type leases. Hoyt stated that all of these research-and-development costs were 

related to the items that Xerox sold and that the fact that these costs may also be 

related to items that were leased does not make them any less directly related to the 

products that Xerox sold. According to Hoyt, all of the research and development 

leads to the production of all of the products, including those that were sold. In 

finding of fact 43, the trial court found that trial testimony established that 

research-and-development costs “are not bifurcated by the type of distribution 

agreement that is used by the customer to acquire equipment.” In the finding, the 

trial court also found that all research-and-development costs “related to a piece of

equipment which [sic] were required to create that equipment.” The Comptroller 

Parties have not asserted or shown that the trial evidence is legally or factually 
39

insufficient to support finding of fact 43. After examining the trial evidence under 

the applicable standard of review, we conclude that the Comptroller Parties have 

not shown that they conclusively proved that any of these costs were not costs 

attributable to research, experimental, engineering, and design activities directly 

related 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.3d at 322; 

Bethel, 635 S.W.2d at 844. The Comptroller Parties have not shown that it would 

have been improper for Xerox to have included these costs in its COGS deduction.

7. The Comptroller Parties’ failure to show that they conclusively 

proved they were entitled to recover on their counterclaim

For Report Year 2008, Xerox originally reported a total COGS deduction of

$4,910,835,415. During the litigation in the trial court below, Xerox reviewed its 

COGS deduction calculation and determined that its total COGS deduction for

Report Year 2008 should have been $5,994,240,999. In their counterclaim, the 

Comptroller Parties alleged that Xerox’s total COGS deduction for Report Year 

2008 should have been much less than $4,910,835,415. The Comptroller Parties 

argued that Xerox’s COGS was less than thirty percent of its total revenue of 

$10,040,814,565, which would be $3,012,244,369.50. The Comptroller Parties had 

the burden of proving their entitlement to relief on their counterclaim. See Queen, 

495 S.W.3d at 322. The trial court found against the Comptroller Parties on their 

counterclaim, and therefore on appeal they must demonstrate that the trial evidence 

conclusively established their entitlement to recovery on their counterclaim.

See Dow Chem. Co., 46 S.W.3d at 241. As to Report Year 2008, we have

presumed the Comptroller Parties’ complaints have merit as to the following three

items: (1) $4,619,370 in costs from Line 119 of Defendant’s Exhibit 19, (2) 

$4,835,572 in costs from Line 43 of Defendant’s Exhibit 19, and (3) $15,542,301
40

in costs from Line 236 of Defendant’s Exhibit 19. The sum of these three lines is 

$24,997,243. We have concluded that all of the Comptroller Parties’ other 

complaints as to Report Year 2008 lack merit. Even presuming for the sake of 

argument that the Comptroller Parties’ complaints as to these costs totaling 

approximately $25 million have merit, the Comptroller Parties have not shown that

the trial evidence conclusively proves that Xerox’s total COGS deduction for 

Report Year 2008 should have been less than $4,910,835,415. See Dow Chem.

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

For Report Year 2009, Xerox originally reported a total COGS deduction of

$4,995,383,684. During the litigation in the trial court below, Xerox reviewed its 

COGS deduction calculation and determined that its total COGS deduction for

Report Year 2009 should have been $6,647,888,992. In their counterclaim, the 

Comptroller Parties alleged that Xerox’s total COGS deduction for Report Year 

2009 should have been much less. The Comptroller Parties argued that Xerox’s 

COGS was less than thirty percent of its total revenue of $10,671,394,110, which 

would be $3,201,418,233. As to Report Year 2009, we have presumed the

Comptroller Parties’ complaints have merit as to the following two items: (1) 

$9,520,568 in costs from Line 137 of Defendant’s Exhibit 20, and (2) $2,267,218

in costs from Line 60 of Defendant’s Exhibit 20. The sum of these two lines is 

$11,787,786. We have concluded that all of the Comptroller Parties’ other

complaints as to Report Year 2009 lack merit. Even presuming for the sake of 

argument that the Comptroller Parties’ complaints as to these costs totaling 

approximately $12 million have merit, the Comptroller Parties have not shown that

the trial evidence conclusively proves that Xerox’s total COGS deduction for 

Report Year 2009 should have been less than $4,995,383,684. See Dow Chem.

Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at 322; Bethel, 635 S.W.2d at 844.
41

The Comptroller Parties have not shown that the trial evidence conclusively 

proved their entitlement to recover on their counterclaim. We overrule the 

Comptroller Parties’ first issue.

III. CONCLUSION

The Comptroller Parties have not shown that the trial court erred in

concluding for each report year that the total revenue from Xerox’s activities in 

wholesale trade was greater than the total revenue from Xerox’s activities in trades

other than the wholesale trades. The Comptroller Parties have not shown that the 

trial court erred in determining that the applicable franchise tax rate for Xerox 

during the Time Period at Issue was 0.5% rather than 1.0%. The Comptroller 

Parties have not shown that the trial court erred in rendering a take-nothing 

judgment as to their counterclaim. Accordingly, we affirm the trial court’s 

judgment.

/s/ Randy Wilson

Justice

Panel consists of Justices Zimmerer, Poissant, and Wilson.