No. 03-14-00713-CV

____________________________ 

IN THE COURT OF APPEALS 

THIRD JUDICIAL DISTRICT OF TEXAS 

AT AUSTIN 

________________________________________ 

Glenn Hegar, Comptroller of Public Accounts of the State of 

Texas; and Ken Paxton, Attorney General of the State of Texas, 

Appellants

v.

CGG Veritas Services (U.S.), Inc., 

Appellee. 

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT

CAUSE NO. D-1-GN-12-001316, HONORABLE TIM SULAK PRESIDING

APPELLEE’S BRIEF

Amanda G. Taylor

ataylor@textaxlaw.com

Texas Bar No. 24045921

James F. Martens

jmartens@textaxlaw.com

Texas Bar No. 13050720

Lacy L. Leonard

lleonard@textaxlaw.com

Texas Bar No. 24040561

Danielle Ahlrich

dahlrich@textaxlaw.com 

Texas Bar No. 24059215

MARTENS, TODD, LEONARD,

TAYLOR & AHLRICH 

301 Congress Avenue, Suite 1950 

Austin, Texas 78701 

Tele: (512) 542-9898 

Fax: (512) 542-9899

ATTORNEYS FOR APPELLEE, 

CGG VERITAS SERVICES (U.S.), 

INC.

ORAL ARGUMENT REQUESTED

ACCEPTED

03-14-00713-CV

6156364

THIRD COURT OF APPEALS

AUSTIN, TEXAS

7/21/2015 1:12:23 PM

JEFFREY D. KYLE

CLERK

 FILED IN 3rd COURT OF APPEALS AUSTIN, TEXAS 7/21/2015 1:12:23 PM JEFFREY D. KYLE Clerk
i 

TABLE OF CONTENTS 

TABLE OF CONTENTS ..................................................................................... i

INDEX OF AUTHORITIES .............................................................................. v

RECORD ABBREVIATIONS ...........................................................................ix

REQUEST FOR ORAL ARGUMENT ................................................................ x

RESPONSIVE ISSUES PRESENTED ..............................................................xi

STATEMENT OF FACTS .................................................................................. 1

I. CGG PRODUCES AND SELLS SEISMIC DATA FOR USE IN OIL &

GAS PROJECTS. ................................................................................. 1

A. The Acquisition and Production of Seismic Data 

Requires Physical and Mental Effort that is Difficult 

and Costly. ............................................................................ 1

B. Seismic Data is Essential to Drilling Projects. ..................... 5

C. Sales to Proprietary Customers. .......................................... 7

D. Sales through Multi-Client Data Library (MCDL). ............ 8

II. PROCEDURAL HISTORY. .................................................................. 11

A. CGG Calculated its 2008 Franchise Taxes Using the 

COGS Deduction. ............................................................... 11

B. The Comptroller Denied the COGS Deduction and 

Assessed Additional Taxes Based on Incomplete 

Information. ....................................................................... 12

C. CGG Paid the Assessment Under Protest and Filed 

Suit. ..................................................................................... 14
ii

D. The Comptroller’s Counterclaim Was Separately 

Resolved. ............................................................................ 16

E. CGG Has “Apportionment” Claims Separately 

Pending at the Administrative Level. ................................ 16

F. The Trial Court Entered a Final Judgment and Made 

Findings and Conclusions in Favor of CGG. ......................18

SUMMARY OF THE ARGUMENT ................................................................. 19

STANDARDS OF REVIEW .............................................................................22

I. STATUTORY CONSTRUCTION. ...........................................................22

II. FINDINGS OF FACT AND CONCLUSIONS OF LAW. ...............................23

ARGUMENT ...................................................................................................25

I. FRANCHISE (MARGIN) TAX CALCULATION. ......................................25

II. THE COGS DEDUCTION, SECTION 171.1012. .................................. 28

A. Does the Taxpayer Qualify for the COGS Deduction? ...... 28

B. What Costs are Allowed for the COGS Deduction? .......... 30

III. CGG QUALIFIES FOR THE COGS DEDUCTION. ................................ 30

A. CGG Qualifies as a “Deemed Owner.” ...............................31

1. CGG furnishes labor and materials. .........................32

a. Labor. ............................................................. 33

b. Materials. ....................................................... 34

c. The Comptroller’s categorical attempt to 

separate “labor and materials” from 

“geological and geophysical” work 

misinterprets the statute. ...............................35
iii

d. The Comptroller’s argument that CGG’s 

work is a “service” that is not “fatiguing, 

difficult, or compulsory” enough to 

constitute “labor” is an improper recast 

of its previously-rejected “physical 

change” theory. .............................................. 40

e. The Comptroller’s two-sentence 

argument regarding “materials” is 

unavailing. ...................................................... 44

2. CGG’s activities are sufficiently connected to a 

real-property improvement project. ........................45

B. CGG Qualifies as an “Actual Owner.” ............................... 50

1. CGG owns and sells seismic data. ........................... 50

2. The seismic data is a “good” for purposes of the 

COGS deduction. ...................................................... 51

a. TPP for COGS is different than TPP for 

sales tax or apportionment. ........................... 54

b. CGG’s seismic data satisfies the 

definition in Section 

171.1012(a)(3)(A)(ii). .......................................57

IV. ALL OF CGG’S COSTS ARE ALLOWED FOR THE COGS

DEDUCTION....................................................................................63

A. The Comptroller Waived Any Challenge to the Actual 

Costs Deducted. ..................................................................63

B. The Statute Does Not Require Parsing of Costs. ...............65

V. NO DEFERENCE IS OWED TO THE COMPTROLLER’S POSITIONS. ........ 68
iv

PRAYER ..........................................................................................................70

CERTIFICATE OF COMPLIANCE ................................................................. 71

CERTIFICATE OF SERVICE ..........................................................................72

APPENDIX: 

1. P.Ex.4, p.D0062-68: August 2010 Auditor Dullum’s Notes 

2. P.Ex.5: September 2010 Additional Tax Assessment 

3. P.Ex.19: CGG’s COGS Calculation, Breakdown

4. P.Ex.48: CGG’s COGS Calculation, Overview 
v 

INDEX OF AUTHORITIES

CASES

American Multi-Cinema, Inc. v. Hegar, 

No. 03-14-00397-CV, --S.W.3d --, 2015 WL 1967877 

(Tex. App.—Austin Apr. 30, 2015, no. pet. h.) ............................ passim

Avis v. First Nat. Bank of Wichita Falls, 

174 S.W.2d 255 (Tex. 1943) .................................................................51

City of Keller v. Wilson, 

168 S.W.3d 802 (Tex. 2005 ................................................................60

Combs v. Newpark, 

422 S.W.3d 46 (Tex. App.—Austin 2013, no pet.) ....................... passim

Combs v. Roark Amusement & Vending, L.P., 

422 S.W.3d 632 (Tex. 2013) ................................................... 23, 49, 68 

DPRS 15th St., Inc. v. Texas Skyline, Ltd., 

No. 03-11-00101-CV, 2014 WL 4058796 (Tex. App.—Austin 

Aug. 13, 2014, no pet.) ........................................................................24

Graham Cent. Station, Inc. v. Pena, 

442 S.W.3d 261 (Tex. 2014) ................................................................24

Greater Houston P’ship v. Paxton, 

No. 13-0745, 2015 WL 3978138 (Tex. June 26, 2015) ........................22

Houston Fire & Cas. Ins. Co. v. Hales, 

279 S.W.2d 389 (Tex. Civ. App.—Eastland 1955, writ ref’d n.r.e.)......45

In re Bass, 

113 S.W.3d 735 (Tex. 2003) ............................................................... 61
vi

In re Nestle USA, Inc., 

387 S.W.3d 610 (Tex. 2012).......................................................... 25, 27 

McGalliard v. Kuhlmann, 

722 S.W.2d 694 (Tex. 1986) ...............................................................24

Murray v. Grayum, 

No. 03-10-00165-CV, 2011 WL 2533796 (Tex. App.—Austin 

June 24, 2011, pet. denied) ................................................................. 24

Roark Amusement & Vending, L.P. v. Combs, 

2011 WL 255535 (Tex. App.—Austin Jan. 26, 2011), 

aff’d by 422 S.W.3d 632 (Tex. 2013) ..................................................69

Sneed v. Webre, 

12-0045, 2015 WL 3451653 (Tex. May 29, 2015) ...............................38

TGS-NOPEC Geophysical Co. v. Combs, 

340 S.W.3d 432 (Tex. 2011) ....................................................... passim

Titan Transp., LP v. Combs, 

433 S.W.3d 625 (Tex. App.—Austin 2014, pet. denied) .......... 26, 27, 42 

Upjohn Co. v. Rylander, 

38 S.W.3d 600 (Tex. App.—Austin 2000, pet. denied)................. 69, 70 

USA Waste Servs., Inc. v. Strayhorn, 

150 S.W.3d 491 (Tex. App.—Austin 2004, pet. denied) ......................68

Vinson v. Brown, 

80 S.W.3d 221 (Tex. App.—Austin 2002, no pet.) ..............................24

W. L. MacAtee & Sons v. House, 

153 S.W.2d 460 (Comm’n of App. adopted by Sup.Ct.)...................... 45
vii 

Zimmer US, Inc. v. Combs, 

368 S.W.3d 579 (Tex. App.—Austin 2012, no pet.) .............................22

STATUTES & RULES

34 Tex. Admin. Code § 3.588 ...................................................... 29, 31, 51, 52 

Tex. Gov’t Code § 311.005............................................................................38

Tex. Gov’t Code § 311.012............................................................................. 47

Tex. Gov’t Code Ch. 2001 ............................................................................42

Tex. R. App. P. 9.4 ........................................................................................71

Tex. R. App. P. 9.5 ........................................................................................ 72

Tex. R. App. P. 38.1 .................................................................................. x, 44 

Tex. R. App. P. 39.1 ........................................................................................ x 

Tex. R. App. P. 43.4 ..................................................................................... 70

Tex. R. Civ. P. 139 ........................................................................................ 70

Tex. Tax Code § 112.052 ................................................................................15

Tex. Tax Code § 112.060 ...............................................................................15

Tex. Tax Code § 121.151 .................................................................................17

Tex. Tax Code § 151.0031 ............................................................................. 52

Tex. Tax Code § 151.009 ........................................................................ 54, 55 
viii 

Tex. Tax Code § 171.051 ...............................................................................69

Tex. Tax Code § 171.088 ...............................................................................69

Tex. Tax Code § 171.103 ............................................................... 17, 51, 54, 56 

Tex. Tax Code § 171.1012 ...................................................................... passim

Tex. Tax Code § 171.1013 ..............................................................................26

Tex. Tax Code § 171.1014 ............................................................. 11, 27, 37, 66 

OTHER AUTHORITIES

Merriam-Webster’s Collegiate Dictionary 765 (11th ed. 2012) ...................... 35

Texas Comptroller of Public Accounts, Letter Ruling 201504069L 

(April 23, 2015) .................................................................................. 67

Texas Comptroller of Public Accounts, Memorandum from Tax Policy 

Division, 201406920L (June 10, 2014) ..............................................43

Webster’s Third New International Dictionary 1259, 

2075 (Phillip Gove Ed. 2002) .............................................................33
ix

RECORD ABBREVIATIONS 

Appellee uses the following abbreviated references to the record: 

Abbreviation Reference 

CR Clerk’s Record (1 volume)

1.RR to 3.RR Volumes 1-3 of the Reporter’s Record, Trial 

Transcript 

4.RR.P.Ex, 

5.RR.D.Ex

Volumes 4-5 of the Reporter’s Record, Plaintiff’s 

and Defendants’ Trial Exhibits 

Excerpts from three depositions were admitted to 

be considered as part of the trial testimony 

(2.RR.10, 32-36).

4.RR.P.Ex.46: Sarah Pai, the Comptroller’s 

corporate representative. 

5.RR.D.Ex.36: John Bastenagle, CGG’s regional 

marketing and sales manager. 

5.RR.D.Ex.35: Kay Hanson-Clerc, CGG’s vicepresident/multi-client controller worldwide. 

1.Supp.RR Supplemental Reporter’s Record, Transcript of 

Hearing on Motion to Enter Judgment
x 

REQUEST FOR ORAL ARGUMENT 

Appellee CGG Veritas Services (U.S.), Inc. respectfully requests that 

this Court grant oral argument to aid in the Court’s decisional process. 

Although this Court has previously analyzed portions of Texas Tax Code 

Section 171.1012 (i.e., the cost of goods sold (COGS) provision at issue here), 

CGG agrees with the Comptroller that this case presents additional issues of 

first impression beyond the Court’s prior holdings. Oral argument will assist 

the Court in understanding the statutory framework and reasonable 

interpretation of these provisions. Tex. R. App. P. 38.1(e), 39.1. 
xi

RESPONSIVE ISSUES PRESENTED 

There is only one issue in this case: Did the trial court correctly decide 

that the Comptroller (Appellants) improperly disallowed the $567 million 

cost of goods sold (COGS) deduction claimed by CGG (Appellee) in 

calculating its margin for franchise tax report year 2008? The answer is yes 

and the judgment should be affirmed in full. 

In response to the sub-issues raised by the Comptroller: 

1. CGG correctly calculated its franchise taxes using the COGS 

deduction because it qualifies as an “owner of goods” under 

Texas Tax Code Section 171.1012(i). CGG qualifies as: 

a. a “deemed owner” because it “furnishes labor or materials 

to a project for the construction or improvement of real 

property” by acquiring and producing seismic data that is 

an essential part of the oil and gas drilling process. 

[Responsive to Issues 3-4.] 

b. an “actual owner” because it owns the seismic data that it 

sells through a “multi-client data library” (MCDL), and 

that data/images satisfies the definition of “goods” because 

the Legislature has chosen to treat this otherwise 

“intangible” property as an artificial form of “tangible 

personal property” exclusively for purposes of the COGS 

deduction. [Responsive to Issue 1.] 

2. As a qualifying owner, the statute directs CGG to deduct all of the 

costs allowed under Sections 171.1012(c), (d), and (f), which total 

$567 million for report year 2008. The Comptroller failed to 

preserve any argument at trial that this amount should be parsed 

by business activity or by cost category. [Responsive to Issue 3.] 

3. No deference is owed to the Comptroller’s positions because: (a) 

the statute is unambiguous, (b) the Comptroller’s arguments are 

unreasonable, and (c) the COGS deduction is akin to an 

“exclusion” rather than an “exemption” from tax. [Responsive to 

Issue 5.] 
1 

STATEMENT OF FACTS 

I. CGG PRODUCES AND SELLS SEISMIC DATA FOR USE IN OIL & GAS 

PROJECTS. 

Appellee CGGVeritas Services (U.S.), Inc. (“CGG”) is “a fully-integrated 

geoseismic company.” (2.RR.73; CR.266 at FOF.2). CGG’s customers are 

“E&P companies”: companies that explore for and produce oil and gas. 

(2.RR.73-74; 5.RR.D.Ex.35, p.10; CR.266 at FOF.5). “CGG designs, acquires, 

processes, [and] occasionally interprets seismic data” in a manner that “aids 

in the construction of [its customers’] oil and gas wells.” (2.RR.74, 144; 

4.RR.P.Ex.7, §§ 1, 4.1; 5.RR.D.Ex.3-12, 15; CR.265-66 at FOF.2-10). 

A. The Acquisition and Production of Seismic Data Requires 

Physical and Mental Effort that is Difficult and Costly. 

CGG produces seismic images by collecting “sound waves” and then 

“writ[ing] them out to some form of media.” (2.RR.76; CR.265 at FOF.3). A 

large crew of workers using powerful materials and equipment, which “make

a physical impact on the property,” are required to create the sound waves. 

(2.RR.106, 111; 3.RR.9; 4.RR.P.Ex.22; 4.RR.P.Ex.47). CGG’s materials and 

equipment include dynamite, large vibroseis trucks that shake the ground, 

marine “airguns” that “make a large bang in the water,” and GPS satellites. 

(2.RR.76, 80-88, 134-35). 
2 

To shoot seismic on land, the dynamite is often placed 100-200 feet 

below the surface, with tens or hundreds of thousands of “shot hole” 

placements, by a crew of 75-100 people. (2.RR.82-83, 106; 3.RR.8-9). The 

vibroseis trucks weigh between 60,000 to 90,000 pounds, and there are 

normally five or six of them in the field. (2.RR.85, 106). The vibration 

created by these trucks leaves a four-inch indentation to the earth below. 

(2.RR.86, 106). For marine settings, CGG uses “as many as 50 airguns in an 

array” and a vessel “about 300 feet long.” (2.RR.87). For example: 

Land, 

Dynamite

Land, 

Vibroseis
3 

(4.RR.P.Ex.47, p. 5, 7, 10) (in color, as admitted at trial). 

CGG furnishes a variety of other materials in connection with the use 

of its large equipment. For example, in one of its customer’s projects, CGG 

was required to supply the following materials: 

 

(4.RR.P.Ex.9, p.12). 

Marine
4 

CGG’s labor generate sound waves that “illuminate the subsurface of 

the earth,” and allow CGG to “produce a three-dimensional image . . . to see 

below the surface.” (2.RR.76, 81; 3.RR.7-8; 5.RR.D.Ex.15; 5.RR.D.Ex.36, 

p.9-11; CR.265 at FOF.2, 4). The “seismic data in its raw form is written out 

onto some sort of media, like magnetic tapes or USB drives.” (2.RR.81; 

3.RR.7). 

This is an “extremely specialized” process. (2.RR.88; 3.RR.21-22; 

CR.265 at FOF.4). CGG does “[s]ome minor processing on site” at the 

intended drilling location but then turns the raw sound recordings into 

seismic images using “high-powered algorithms” at its processing center. 

(2.RR.89, 133; 3.RR.7; 5.RR.D.Ex.36, p.14). This requires complex hardware 

and software, and “a lot of highly-trained and experienced people.” 

(2.RR.90, 112-13; 3.RR.10; 4.RR.P.Ex.14, p.18). Generating seismic images 

is “a lot of science and somewhat of an art.” (2.RR.141). As one CGG 

employee described it by simplified analogy: “the raw data is like a black and 

white [photograph]. . . . I colorize it and I touch it up. And I print it out in a 

form that you can use.” (5.RR.D.Ex.36, p.26). Generally, “[t]he ultimate 

output is a high resolution digital image of the subsurface of the earth.” 

(2.RR.92). For example: 
5 

(4.RR.P.Ex.47, p.14) (in color, as admitted at trial). 

The time spent by CGG’s workers to acquire seismic date and produce 

seismic images ranges from several months to several years. (2.RR.91, 137-

39). This process is very expensive. The “average” cost is “tens of millions of 

dollars” and it can be as high as “hundreds of millions of dollars.” (3.RR.24-

25). 

B. Seismic Data is Essential to Drilling Projects. 

The geo-seismic work performed by CGG “constitutes an integral part” 

of its customers’ oil and gas production business. (2.RR.102; CR.266 at 

FOF.6-7, 10). The contracts between CGG and its E&P customers expressly 

recognize that CGG’s work is performed for “the benefit of the [customer]”; 

that “[t]he work performed by [CGG] . . . is part of [the customer’s] trade, 
6 

business, or occupation”; and “[a]s such, [CGG’s] work constitutes an 

integral part of the [customer’s] business necessary to generate [customer’s] 

goods, products, and services.” (4.RR.P.Ex.7, §§ 1, 4.1). CGG’s work is 

“important to the entire drilling project.” (2.RR.130). All of CGG’s 

customers intend to use the seismic data to construct productive oil and gas 

wells. (3.RR.26-27). None of CGG’s customers pay for the acquisition and 

production of seismic data simply to ignore it and drill regardless of the 

information they see on the seismic images. (2.RR.130). 

The purpose of the geophysical work performed by CGG is to locate oil 

and gas for drilling and production. (2.RR.101; CR.266 at FOF.6-7, 10). 

CGG’s seismic data provides a “roadmap” or a “blueprint for the project,”

which its customers use “as a guide [for] where to drill the wells, [and] how 

deep to drill the wells.” (2.RR.75-76, 130). By demonstrating the “porosity, 

permeability, rock type, . . . [and] depth” of the earth’s subsurface, CGG’s 

seismic images allow petroleum companies “to identify fairly clearly 

potential places to drill.” (2.RR.94-96). The data can also show “geohazards,” like an “overpressurized zone[] . . . that would be dangerous to the 

drilling operations.” (2.RR.130). In these instances, the data helps a 

customer determine that it should drill elsewhere. (2.RR.130). 
7 

The subsurface of the earth is complex and non-uniform. There may 

be salt domes and other structures under the surface that would prevent one 

from reaching the oil and gas reservoirs if they were to just drill straight 

down without the use of a seismic data map. (2.RR.78-80, 93). “[Y]ou have 

to have a high-resolution image to be able to do that.” (2.RR.80). The 

seismic map (especially in 4-D format) can identify mineral resources that 

were otherwise compartmentalized and bypassed with prior methods. 

(2.RR.116-17; 3.RR.24; 4.RR.P.Ex.14, § 1.5). 

C. Sales to Proprietary Customers. 

CGG performs its work for both “proprietary” and “non-proprietary” 

customers. (2.RR.117; CR.265 at FOF.2). A proprietary customer is typically 

an E&P company that pays CGG to develop and sell it seismic images of an 

area designated by the customer for the customer’s exclusive ownership and 

use. (2.RR.117). Proprietary customers acquire all rights to the seismic data 

(both raw data and processed images). (2.RR.117, 134). This information is 

confidential and provides a valuable edge over competitors. (2.RR.117). 

CGG enters a Master Agreement for Geophysical Services with its 

proprietary customers. (2.RR.101, 108-09; 4.RR.P.Ex.7; 4.RR.P.Ex.12). The 

contract states the basic scope of work and describes the labor and materials 
8 

to be furnished to the project, as illustrated above. (2.RR.105, 109, 111; see, 

e.g., 4.RR.P.Ex.7, p.1, 9, Schedules; 4.RR.P.Ex.9, p.12, 15-18).

CGG gets involved “early on” in the customer’s drilling project. 

(2.RR.75). By this point, the typical customer has identified a prospective 

drilling area based on “a lot of geologic work” and has “establish[ed] a lease 

position” that will allow them to drill there. (2.RR.75, 96). The customers 

specify the area where they want CGG to shoot seismic, the scope of CGG’s 

work, and the necessary timeline. (2.RR.97). In some cases, a customer may 

already own the raw data and provide it to CGG for processing. (2.RR.98, 

141-42; 5.RR.D.Ex.36, p.12).

Because CGG’s seismic data is critical to the success of an oil and gas

project, CGG must deliver its products timely and keep the customer 

informed. (2.RR.128; 3.RR.22-23). CGG provides frequent updates, and the 

customers often have on-site representatives. (2.RR.128-29; 3.RR.25). CGG 

may provide intermediate seismic images to help the customer make prompt 

decisions about when and where to drill. (2.RR.140; 3.RR.26).

D. Sales through Multi-Client Data Library (MCDL). 

The non-proprietary division of CGG’s business is called the “multiclient data library” (MCDL). (2.RR.118; CR.266 at FOF.11). When a drilling 

area is “hot” with several E&P companies interested, CGG may choose to 
9 

fund the up-front cost of acquiring the data and producing the seismic 

images. (2.RR.118, 121; 4.RR.P.Ex.18). Sometimes, customers approach 

CGG requesting that it produce MCDL images for a certain area, and they 

help fund the project. (3.RR.19; 5.RR.D.Ex.36, p.12). Either way, to ensure 

the endeavor is profitable, CGG will generally not begin MCDL work unless it 

has a requisite minimum of “pre-commitments” from customers who want 

to use the images. (See 5.RR.D.Ex.13, p.23-24). 

CGG then puts those products “on the shelf” and “try[s] to sell them to 

as many people as possible.” (2.RR.118-19; 3.RR.20; 4.RR.P.Ex.18; 

5.RR.D.Ex.35, p.8, 12-13). The data available for any particular area can be 

delivered in several different mediums or “derivatives,” ranging from the raw 

sound recordings to a fully-processed image. (2.RR.118-19, 122; 3.RR.13-14; 

4.RR.P.Ex.17; 5.RR.D.Ex.36, p.20). 

The labor and materials necessary to acquire, process, and sell seismic 

data is the same for the MCDL products as it is for the proprietary 

customers. (5.RR.D.Ex.36, p.12-13, 17). The only difference is that, with 

proprietary customers, CGG sells the exclusive rights to the data to one 

customer, while with MCDL customers, CGG sells a non-exclusive license to 

use the data to as many customers as possible. (5.RR.D.Ex.35, p.13, 16-17). 
10

CGG enters a “Master Geophysical Data-Use License Agreement” with 

MCDL customers. (2.RR.122, 124, 126; 4.RR.P.Ex.10; 4.RR.P.Ex.17; 

5.RR.D.Ex.35, p.17). The customer purchases a “license to use” the seismic 

data product. (2.RR.123, 125, 134; 5.RR.D.Ex.35, p.11, 17). CGG maintains 

ownership of the underlying seismic data. (2.RR.123-24; 5.RR.D.Ex.36, 

p.13, 17, 19). The Agreement specifies what the customer can do with the 

data and places restrictions on the customer’s ability to share the 

information. (2.RR.125, 143; 5.RR.D.Ex.35, p.17; 5.RR.D.Ex.36, p.28-29). 

Supplements to the Agreement describe the medium of the data being 

licensed. (2.RR.126-28; 5.RR.D.Ex.35, p.17-18).

CGG’s goal is to sell its MCDL data “to as many people as [it] can,” 

regardless of the medium. (2.RR.119, 125; 3.RR.13; CR.267 at COL.13). Of 

the 11,854 oil and gas companies registered with the Texas Railroad 

Commission, CGG intends to sell its MCDL products to “[a]ll of them.” 

(2.RR.120; 4.RR.P.Ex.25). As of trial, CGG had actively worked with more 

than half (over 6,000) of those companies. (2.RR.120). It has licensed the 

same seismic image for a single area to as many as 114 companies. (3.RR.17; 

CR.266 at FOF.12).
11

II. PROCEDURAL HISTORY. 

A. CGG Calculated its 2008 Franchise Taxes Using the COGS 

Deduction. 

CGG timely filed its 2008 Texas Franchise Tax Report paying 

approximately $1.3 million in taxes. (3.RR.33; 4.RR.P.Ex.1; CR.267 at 

FOF.14). CGG calculated its taxable margin by first determining its revenue 

and then deducting its allowable costs of goods sold (“COGS”) from that 

amount. (3.RR.37-39); see infra, Argument I. 

CGG is a “combined group” that is required to calculate its franchise 

taxes in accordance with Texas Tax Code Section 171.1014. (3.RR.34-37, 39). 

As such, CGG must “file[] a single tax report . . . elect[ing] to take the same 

general deduction [for] all members” of its integrated company. See Combs 

v. Newpark, 422 S.W.3d 46, 48 (Tex. App.—Austin 2013, no pet.). 1 Upon 

calculating the COGS amounts attributable to each of CGG’s members and 

summing them together, CGG’s total COGS amount for report year 2008 was 

$567,600,223 (hereafter, “$567 million”). (3.RR.41; 4.RR.P.Ex.1; 

4.RR.P.Ex.19; CR.267 at FOF.15).2 

 

1

 The Comptroller does not raise any argument related to CGG’s combined group 

status as it did in Newpark, 422 S.W.3d at 52.

2 There is a typographical error in FOF.15(c): it should cite Section 171.1012(f) 

rather than subsection (e) regarding indirect or administrative overhead costs. (See

4.RR.P.Ex.1, line 12).
12

CGG’s tax department determined that it was eligible for the COGS 

deduction based on frequent communication with the project managers and 

personal knowledge about the nature of CGG’s business, including the facts 

underlying the revenues and expenses reported in CGG’s general ledger. 

(3.RR.40; 4.RR.P.Ex.21). They used this information to capture CGG’s costs, 

and included in the COGS calculation only the costs eligible for deduction 

under the statute. (3.RR.40-41, 48-52, 54-56; 4.RR.P.Ex.19; 4.RR.P.Ex.48; 

5.RR.D.Ex.35, p.15); see Tex. Tax Code § 171.1012(c), (d), (e); infra, 

Argument IV. CGG’s federal and state tax director, Ms. Listya Diyah—who 

holds master’s degrees in both tax and finance, and has decades of corporate 

experience in these areas (3.RR.29-32)—personally reviewed the source 

documents and the calculations, and believes all of the numbers are 

accurate. (3.RR.42-43, 53). 

B. The Comptroller Denied the COGS Deduction and Assessed 

Additional Taxes Based on Incomplete Information. 

After CGG filed its tax report, it received a letter stating that the 

Comptroller was reviewing whether CGG qualified for the COGS deduction. 

(3.RR.44-45; 4.RR.P.Ex.2). The letter expressly stated that “[t]his review is 

not an audit” but it directed CGG to “complete the enclosed form” and return 

it within 15 days. (4.RR.P.Ex.2; see also 3.RR.81). The one-page form 
13

requested only two pieces of information: (1) a description of the entity’s 

activities, and (2) a list of items included in the COGS calculation. 

(4.RR.P.Ex.3). CGG timely responded with this information. (3.RR.46-47; 

4.RR.P.Ex.3). CGG anticipated that the Comptroller would then initiate a 

formal audit but it did not receive any further communications in that 

regard. (3.RR.47-48). 

Instead, CGG received a letter stating that the Comptroller had 

completed his review of CGG’s 2008 franchise tax report, and “determined 

that [CGG] did not qualify for the [COGS] deduction.” (3.RR.48; 

4.RR.P.Ex.5; CR.267 at FOF.16). The Comptroller included a bill assessing 

CGG an additional $1,301,568 (hereafter, “$1.3 million”) in tax plus interest. 

(3.RR.48, 54; 4.RR.P.Ex.5). 

Mr. Gary Dullum, an auditor for the Comptroller, was responsible for 

reviewing CGG’s information, making the decision to deny its COGS 

deduction, and assessing CGG an additional $1.3 million in taxes. (3.RR.64, 

78-79, 82-83; 4.RR.P.Ex.4-5). He did so as part of the Comptroller’s larger 

“Cost of Goods Sold Project,” which targeted taxpayers statewide whom the 

Comptroller believed to be “service providers” or “something other than . . . 

manufacturing or retail or wholesale” providers. (3.RR.80, 91-92). 
14

In making his decision about CGG’s 2008 taxes, Dullum never spoke 

to CGG’s named representative, tax director Stephen Marshall. (3.RR.82; 

4.RR.P.Ex.4, p.D0064). Dullum never visited CGG’s facilities nor otherwise 

examined the nature of CGG’s business (beyond the two pages of 

information provided by CGG in response to the Comptroller’s form and a 

“tour” of CGG’s website). (3.RR.83; see 4.RR.P.Ex.3; 4.RR.P.Ex.4, 

p.D0066). His notes reflect that he was not even aware of the work CGG 

performed for its proprietary customers. (4.RR.P.Ex.4, p.D0065). Dullum 

spent a total of 3 hours conducting a “limited” review before deciding to 

assess CGG an additional $1.3 million in taxes. (3.RR.83; 4.RR.P.Ex.4, 

p.D0062, 65). 

Dullum’s incorrect conclusion was based on his misunderstandings 

that CGG is merely a “service provider” and that Section 171.1012(i) requires 

a taxpayer to “affect a physical change” to real property to qualify for the 

COGS deduction—a litigating position taken at trial but now publically 

abandoned by the Comptroller. (3.RR.80, 84-85, 88-89, 141; 4.RR.P.Ex.4, 

p.D0066; 4.RR.P.Ex.46, p.31); infra, Argument III.A.1.d. 

C. CGG Paid the Assessment Under Protest and Filed Suit. 

CGG paid $1,483,233 under protest covering the $1.3 million in

additional taxes plus interest accrued through the date of payment. 
15

(4.RR.P.Ex.6; CR.267 at FOF.17-18). CGG filed a protest letter with this 

payment explaining, inter alia, why it qualified for the COGS deduction in 

the full amount of $567 million. (4.RR.P.Ex.6). CGG thereafter filed suit 

asserting these same grounds and seeking a full refund with interest. 

(3.RR.54; CR.4-10, 265 at FOF.1); see also Tex. Tax Code §§ 112.052, 

112.060. This claim was tried to the bench before the Honorable Tim Sulak 

in Travis County. 

Although CGG maintains that it qualifies to deduct the full COGS 

amount and is entitled to a full refund on this basis, at trial it proved five 

alternative calculations based on its various business activities. (3.RR.52-55; 

4.RR.P.Ex. 49). CGG also provided a break-down of all of the costs included 

in its COGS deduction by each category allowed for deduction under 

Sections 171.1012(c), (d), and (f). (3.RR.40-41, 48-52, 54-56; 4.RR.P.Ex.19; 

4.RR.P.Ex.48). 

At trial, the Comptroller challenged only whether CGG qualified for the 

COGS deduction under Section 171.1012(i). It preserved no argument about 

whether the specific costs included in CGG’s COGS calculation are allowed 

for deduction under subsections (c), (d), and (f). (See 2.RR.16; 3.RR.58-63, 

91-98; CR.41-66); infra, Argument IV.A. The Comptroller rested without 

presenting any evidence. (3.RR.161). The court “rule[d] in favor of [CGG] 
16

for the full amount of the refund sought” and requested that CGG prepare an 

appropriate order. (CR.217). 

D. The Comptroller’s Counterclaim Was Separately Resolved. 

The Comptroller counter-claimed that the amount of “research and 

development (R&D) credit” claimed by CGG for report year was too high. 

(CR.25-32). That claim was bifurcated and, following the COGS bench trial, 

it was resolved by a joint stipulation. (CR.35, 188-89). The parties 

stipulated that “the amount of the R&D carry-forward credit available for 

[CGG] to claim beginning with its 2008 Texas Franchise Tax Report is 

$782,268.” (CR.188-89). 

E. CGG Has “Apportionment” Claims Separately Pending at the 

Administrative Level. 

Following resolution of the only two claims in this lawsuit, both parties 

agreed that it was appropriate for the court to sign a final judgment that the 

Comptroller owes CGG a tax refund for report year 2008. (CR.194, 200, 

202-03). However, the parties disagreed about how to calculate that refund 

in light of separately-pending administrative claims regarding the 

“apportionment factor” to be used in calculating CGG’s 2008 taxes. (CR.203-
17

07, 228-230); see Tex. Tax Code § 121.151 (requiring that CGG initiate these 

claims at the administrative level).3 

If CGG prevails on its separate apportionment claims, it will further 

decrease the “tax due” amount shown on line 30 of its 2008 franchise tax 

report. (CR.206-07, 220). This, in turn, will impact how much of the R&D 

credit CGG applies to its 2008 taxes versus carries forward for application to 

future years because the credit is capped at 50% of the tax due amount for 

any given year. (CR.207, 220, 225; 1.Supp.RR.19). In combination, this 

could result in an additional refund owed to CGG of approximately $1 

million. (CR.206; 1.Supp.RR.9, 11). 

CGG was concerned that, if the judgment calculated a “final refund”

amount, the Comptroller would later argue CGG was barred by res judicata 

or collateral estoppel from collecting any further refund for report year 

2008. (1.Supp.RR.8-9). The Comptroller agreed it would not do so, and 

agreed that CGG would be entitled to seek an additional refund if it prevails 

on the apportionment claims. (1.Supp.RR.26-30). 

 

3 “Apportionment” refers to the method by which CGG’s tax base is divided 

between Texas and locations outside of Texas. Tex. Tax Code § 171.103. “Because all of 

a company’s . . . taxable margin may not be attributable to business done in Texas, 

receipts must be apportioned between Texas and other jurisdictions. The tax code does 

this by multiplying an entity’s . . . taxable margin . . . by a fraction, the numerator of 

which consists of receipts from business done in Texas, . . . and the denominator of 

which consists of all receipts from business anywhere, including Texas.” TGS-NOPEC 

Geophysical Co. v. Combs, 340 S.W.3d 432, 437 (Tex. 2011). 
18

F. The Trial Court Entered a Final Judgment and Made Findings 

and Conclusions in Favor of CGG. 

The trial court entered a final judgment (1) concluding that CGG “is 

entitled to claim a [COGS] deduction in the amount of $567,600,223” for 

report year 2008; (2) incorporating the parties’ stipulation on the R&D 

credit amount; and ordering that (3) CGG’s tax due4 was $1,721,022.23; (4) 

the Comptroller shall issue an appropriate refund check with interest; and 

(5) CGG shall not be barred from seeking an additional refund upon final 

disposition of its apportionment claims. (CR.250-51). 

The trial court also issued findings of fact (FOF) and conclusions of law 

(COL) in support of the judgment. (CR.265-270). These findings and 

conclusions confirm that CGG qualifies for the COGS deduction under 

Section 171.1012(i), and that all of the costs included in its COGS calculation 

were allowed by Sections 171.1012(c), (d), and (f). (CR.265-270). 

 

4 The “tax due” amount (line 30) was calculated using the higher apportionment 

factor, which CGG disputes via its administrative claims. 
19

SUMMARY OF THE ARGUMENT 

The trial court correctly determined that CGG is entitled to claim a 

$567 million cost of goods sold (COGS) deduction in calculating its 2008 

franchise taxes. Under the plain language of Texas Tax Code Section 

171.1012, CGG qualifies to claim the COGS deduction because it is the actual 

and/or deemed owner of goods (per subsection (i)), and CGG incurred costs 

within the categories allowed for deduction (per subsections (c), (d), and (f)). 

The Comptroller, who raises only a couple of legal sufficiency complaints, 

has not demonstrated a complete absence of evidence to support any of the 

trial court’s findings. The Comptroller also has not proven that any of the 

court’s conclusions (which are fully supported by the underlying facts) are

legally wrong. The judgment should be affirmed. 

The Comptroller’s analysis, which begins by looking at the specific 

costs deducted, is convoluted. The threshold question is taxpayer eligibility. 

Once it is determined that a taxpayer qualifies as either an actual or deemed 

owner of goods to calculate its “margin” using the COGS deduction, then the 

taxpayer calculates the amount of its deduction by summing together all of 

the costs allowed by Section 171.1012. 

To qualify as a “deemed owner,” a taxpayer need not actually own or 

sell “goods” as defined by Section 171.1012(a). Thus, the meaning of 
20

“tangible personal property” is irrelevant to this analysis. Instead, a taxpayer 

who “furnishes labor or materials” to projects for the construction or 

improvement of real property is “considered to be the owner of that labor or 

materials,” which provides an alternative way to qualify for the COGS 

deduction. CGG satisfies this test under the analysis set forth in Combs v. 

Newpark, 422 S.W.3d 46, 49 (Tex. App.—Austin 2013, no pet.). In regard 

to both its proprietary and MCDL customers, CGG exerts physical and 

mental effort to acquire and produce seismic data, which is a critically 

important part of oil and gas drilling/production projects. The Comptroller’s 

contrary arguments (1) improperly conflate qualifying “activities” with 

allowable “costs,” and (2) construe Newpark in an overly-narrow manner 

based on the same principals underlying the Comptroller’s previouslyrejected theory that a taxpayer must “effect a physical change” to the 

property. 

To qualify as an “actual owner,” the taxpayer must actually own goods 

based on traditional incidents of ownership. It is undisputed that CGG owns 

the seismic data that it sells through the multi-client data library (MCDL). 

This data, although otherwise considered “intangible” for sales tax and 

apportionment purposes, is specially treated as “tangible personal property” 

exclusively for purposes of the COGS deduction. Thus, it satisfies the 
21

definition of “goods” under Section 171.1012(a)(3)(A)(ii). The Comptroller’s 

argument is fundamentally flawed because it fails to appreciate the 

difference in treatment of this unique type of intellectual property for 

purposes of the COGS deduction, and his interpretation of the relevant 

definition is overly narrow. 

Because CGG qualifies under subsection (i) as an actual and/or 

deemed owner, CGG is entitled to deduct all of its incurred costs allowed by 

the categories listed in subsections (c), (d), and (f). For report year 2008, 

this amount totaled $567 million, which was calculated for CGG’s entire 

business as a combined group pursuant to the analysis set forth by this Court 

in Newpark, 422 S.W.3d at 52. At trial, the Comptroller challenged only 

whether CGG qualified for the COGS deduction and preserved no complaint 

about the specific costs to be included in the calculation. In any event, CGG’s 

calculation is legally correct and supported by sufficient evidence. 

Section 171.1012 is not ambiguous. Newpark, 422 S.W.3d at 56 n.9 

Hence, there is no need to defer to the Comptroller’s contrary litigating 

position nor to add words or requirements into the statute that our 

Legislature did not intend. Moreover, the COGS deduction should be 

construed strictly against the Comptroller because it is akin to an “exclusion” 

rather than an “exemption” from tax.
22

STANDARDS OF REVIEW 

I. STATUTORY CONSTRUCTION. 

“The issues in this case primarily concern the proper construction of 

chapter 171 of the Tax Code.” Newpark, 422 S.W.3d at 49. Statutory 

construction is a question of law reviewed de novo. Id. The primary 

objective is to ascertain and give effect to the legislature’s intent by first 

considering the statute’s plain language. Id. Courts should reject any 

attempt to read words or requirements into the statute that were not 

intended by our Legislature. See Zimmer US, Inc. v. Combs, 368 S.W.3d 

579, 587 (Tex. App.—Austin 2012, no pet.). “Undefined terms in a statute 

are typically given their ordinary meaning, but if a different or more precise 

definition is apparent from the term’s use in the context of the statute, we 

apply that meaning.” Greater Houston P’ship v. Paxton, No. 13-0745, 2015 

WL 3978138, *5 (Tex. June 26, 2015) (quoting TGS–NOPEC Geophysical 

Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011)). 

If the statutory text is unambiguous, then “it is determinative of 

legislative intent, unless enforcing the plain meaning of the statute’s words 

would produce an absurd result.” Newpark, 422 S.W.3d at 49. “Only when 

the statutory text is ambiguous ‘do we resort to rules of construction or 

extrinsic aids.’” Id. (internal citations omitted). 
23

Finally, “statutory determinations in tax disputes should reflect the 

economic realities of the transactions in issue.” Combs v. Roark Amusement 

& Vending, L.P., 422 S.W.3d 632, 637 (Tex. 2013). “And ‘[t]axing statutes 

are construed strictly against the taxing authority and liberally for the 

taxpayer.” Am. Multi-Cinema, Inc. v. Hegar, No. 03-14-00397-CV, --S.W.3d 

--, 2015 WL 1967877, *3 (Tex. App.—Austin Apr. 30, 2015, no. pet. h.) . 

II. FINDINGS OF FACT AND CONCLUSIONS OF LAW. 

The trial court entered findings of fact and conclusions of law in 

support of the judgment. (CR.265-270). The Comptroller specifically 

challenges: FOF.12-13 (Appellants’ Brief, p.37-38: arguing findings are 

irrelevant and supported by no evidence); COL.1, 2, 4, 5, 7 (id. p.29, 36, 42: 

arguing conclusions are legally incorrect).5 

“[F]indings of fact [are reviewed] for legal and factual sufficiency of the 

evidence by the same standard applied to a jury verdict.” Am. MultiCinema, 2015 WL 1967877, at *4. “When a party attacks the legal sufficiency 

of an adverse finding on an issue on which it did not have the burden of 

proof, it must demonstrate on appeal that no evidence supports the adverse 

finding.” Graham Cent. Station, Inc. v. Pena, 442 S.W.3d 261, 263 (Tex. 

 

5 The Comptroller also claims Finding 7 is “irrelevant” but otherwise concedes its 

accuracy. Id., p.29-30, 42, 49 n.10. Despite the Comptroller’s failure to specifically 

challenge Conclusions 8, 9, and 11, CGG interprets such a challenge to be within the 

scope of the Comptroller’s argument.
24

2014). The court must credit favorable evidence if a reasonable fact-finder 

could, and disregard contrary evidence unless a reasonable fact-finder could 

not. Id. “The trial court, acting as factfinder, is the sole judge of credibility of 

the witnesses and weight to be given to their testimony.” Newpark, 422 

S.W.3d at 49. 

“[C]onclusions of law [are reviewed] de novo to determine their 

correctness.” Am. Multi-Cinema, 2015 WL 1967877, at *4. But even an 

erroneous conclusion will not support reversal if the trial court rendered the 

proper judgment. Id.; see also Vinson v. Brown, 80 S.W.3d 221, 230 (Tex. 

App.—Austin 2002, no pet.). 

Unchallenged fact findings are “binding on the appellate court unless 

the contrary is established as a matter of law, or if there is no evidence to 

support the finding.” McGalliard v. Kuhlmann, 722 S.W.2d 694, 696 (Tex. 

1986). The court must disregard all contrary evidence and, if there is any 

remaining evidence in support of the finding, it must be upheld; and if that 

finding is sufficient to support the judgment, it should be affirmed. Id.; see 

also DPRS 15th St., Inc. v. Texas Skyline, Ltd., No. 03-11-00101-CV, 2014 

WL 4058796, *5-6 (Tex. App.—Austin Aug. 13, 2014, no pet.); Murray v. 

Grayum, No. 03-10-00165-CV, 2011 WL 2533796, *5 (Tex. App.—Austin 

June 24, 2011, pet. denied). 
25

ARGUMENT 

The trial court properly determined that CGG qualifies for the COGS 

deduction as an actual or deemed owner of goods, and that CGG is entitled to 

deduct $567 million in COGS as a result. By allowing CGG to deduct its costs 

and arrive at a tax on net profits, the judgment comports with the overall 

goal of the franchise tax: to tax a business’s margin. 

This Court should reject the Comptroller’s arguments because they 

arise from a misunderstanding of how Section 171.1012 operates, ignore 

ample evidence in the record to support the trial court’s conclusions, and ask 

this Court to read requirements into the statutory text not intended by our 

Legislature. The final judgment appropriately interprets and applies Section 

171.1012 to CGG’s business. It should be affirmed in full. 

I. FRANCHISE (MARGIN) TAX CALCULATION. 

The franchise tax is a tax on the privilege of doing business in Texas. 

TGS-NOPEC, 340 S.W.3d 437. As amended in 2006, the tax is specifically 

designed to be imposed on a business’s margin, not on its revenue, net 

worth, or earned surplus. Id.; see also In re Nestle USA, Inc., 387 S.W.3d 

610, 614, 622 (Tex. 2012). Margin is akin to net profits. See Tex. Tax Code 

§ 171.101. To effectuate this purpose, the statute provides that every method 
26

of calculating one’s franchise tax shall benefit from specified reductions to 

the taxpayer’s total revenue, as discussed below. (See 2.RR.41; 3.RR.68).6 

“[T]he first step for all taxable entities and all methods of computing 

taxable margin is to calculate the taxpayer’s ‘total revenue.’” Titan Transp., 

LP v. Combs, 433 S.W.3d 625, 628 (Tex. App.—Austin 2014, pet. denied); 

Tex. Tax Code § 171.1011 (a)-(d). Taxpayers determine total revenue by 

subtracting statutory exclusions from the gross income reported on federal 

income tax returns. Id. §§ 171.1011(e)-(g)(11), (k), (m)-(n), (q)-(r), (u)-(x). 

“After calculating total revenue, taxpayers may then employ the 

method of determining taxable margin that produces the lowest franchisetax obligation.” Titan, 433 S.W.3d at 628; Tex. Tax Code § 171.101 (a). For 

report year 2008, the code offered three calculations using a specific 

deduction from revenue plus additional credits: (1) the cost of goods sold 

(COGS) deduction under Section 171.1012; (2) the compensation deduction 

under Section 171.1013; and (3) the 70% ceiling/30% default deduction 

under Section 171.101 (a)(1)(A). Titan, 433 S.W.3d at 628-29; Newpark, 422 

S.W.3d at 47-48.

7

 

 

6 The Tax Code provisions applicable to this case are those in effect on January 1, 

2008. For convenience, the citations herein are to the current version of the code unless 

specified to indicate a substantive change between the 2008 and the current version. 

7 In 2008, there was also a “short form” calculation known as the “E-Z method,” 

providing a lower tax rate in lieu of any deductions and credits under Section 171.1016. 
27

The total tax due is calculated as follows (with corresponding 

references to the 2008 franchise tax report, see 4.RR.P.Ex.1):

Total Revenue (calculated with applicable exclusions), items 1-10

— Deduction (1 of 3 methods), items 11-21

= Margin, item 22

Margin

x Apportionment factor, items 23-25

= Apportioned margin, item 26

Apportioned margin

— Other allowable deductions, item 27

= Taxable margin, item 28

Taxable margin

x Tax rate (typically 1%; sometimes 0.5%), item 29

= Tax due, item 30

Tax due

— Tax credits, item 31

— Discount, item 33

= Total Franchise Tax Due, item 34

In re Nestle, 387 S.W.3d at 614-616; Titan, 433 S.W.3d at 627-28. Because 

there is always some deduction from revenue, the resulting tax is one 

imposed on an entity’s margin, not its revenue. See Tex. Tax Code 

§ 171.1014(d). 

 

“Effective January 1, 2014, taxpayers not using the E-Z computation method [] also have 

the option to deduct a flat $1 million from total revenue if that sum is greater than the 

COGS, compensation, or 30% deductions.” Titan, 433 S.W.3d at 628.
28

II. THE COGS DEDUCTION, SECTION 171.1012. 

The only relevant calculation method in this suit is the COGS 

deduction. The Comptroller’s analysis of Section 171.1012 is improperly 

inverted. The Comptroller argues that the Court should first determine 

whether CGG has any allowable costs to deduct as costs of goods sold 

(COGS) and then determine whether CGG qualifies for the deduction. See 

Appellants’ Brief, p.21, 25. 

“That defies the logic of the statute.” (3.RR.155). The threshold 

inquiry is whether the taxpayer qualifies under Section 171.1012(i) to claim 

the COGS deduction. Once the taxpayer crosses that threshold test, the 

taxpayer is entitled to calculate its COGS deduction by including all the costs 

it incurred that are classified as allowable costs under subsections (c), (d), 

and (f). 

A. Does the Taxpayer Qualify for the COGS Deduction? 

Section 171.1012(i) begins by stating that “A taxable entity may make a 

subtraction under this section in relation to the cost of goods sold [i.e. 

qualify to claim the COGS deduction] only if that entity owns the goods.” 

Tex. Tax Code § 171.1012(i). A taxpayer can satisfy this test by being either 

an “actual” or “deemed” owner of goods. Id. As discussed in more detail 

below, these two terms mean: 
29

 Actual owner: a taxpayer who is the “owner of goods . . . 

based on all of the facts and circumstances, including the 

various benefits and burdens of ownership vested with the 

taxable entity.” Id. § 171.1012(i), second sentence; see also

34 Tex. Admin. Code § 3.588(c)(8) (same). 

 Deemed owner: a taxpayer who “furnish[es] labor or 

materials to a project for the construction, improvement, 

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

property.” Tex. Tax Code § 171.1012(i), third sentence; see 

also 34 Tex. Admin. Code § 3.588(c)(8)(A)-(B) (same).8 

The Comptroller devotes much of his argument to whether CGG’s 

seismic data satisfies the meaning of “goods,” as defined for purposes of 

COGS to include certain types of “tangible personal property.” See Tex. Tax. 

Code § 171.1012(a)(1), (3). These terms are relevant only to whether a 

taxpayer is an “actual owner.” The Comptroller’s argument about “tangible” 

property ignores the statute’s alternate provision entitling a taxpayer to 

qualify as a “deemed owner.” CGG first addresses the deemed owner 

provision, and then turns to the actual owner provision along with the 

proper interpretation of goods or “tangible personal property” for purposes 

of the COGS deduction. 

 

8 The last sentence of Section 171.1012(i) provides another way to qualify as a 

“deemed owner,” which is not relevant here: “a taxable entity shall be treated as the 

owner of goods being manufactured or produced by the entity under a contract with the 

federal government. . . .” Id. Other subsections allow certain types of taxpayers to take 

the COGS deduction even if they are not “actual owners” of goods. See id. § 171.1012(k1) (regarding three types of rental or leasing companies), (k-2) (regarding pipeline 

entities who own or lease and operate pipelines transporting product they do not own). 
30

B. What Costs are Allowed for the COGS Deduction? 

Once a taxpayer crosses the threshold qualification for the COGS 

deduction (as either an actual or deemed owner of goods), the statute directs 

the taxpayer to calculate the dollar amount of its deduction by adding all of 

the costs it incurred under the categories allowed by subsections (c), (d), and 

(f). See Tex. Tax Code § 171.1012(i), first sentence (actual and deemed 

owners “may make a subtraction [of costs allowed] under this section”); 

third sentence (confirming deemed owners may “include the costs, as 

allowed by this section, in the computation of [COGS]”) (emphasis added); 

id. §§ 171.1012(c), (d), (f). Infra, Argument IV. 

The costs allowed “by or under this section” include “all direct costs of 

acquiring or producing the goods,” and “up to 4% of its indirect or 

administrative overhead costs—such as legal, security, and accounting 

services—provided that it can demonstrate those costs ‘are allocable to the 

acquisition or production of goods.’” Newpark, 422 S.W.3d at 53. 

III. CGG QUALIFIES FOR THE COGS DEDUCTION. 

CGG qualifies for the COGS deduction as a “deemed owner” based on 

its proprietary and/or MCDL business activities. If this Court agrees, then 

the judgment should be affirmed regardless of whether CGG’s seismic 

images satisfy the definition of “goods” under Section 171.1012(a)(3)(A)(ii). 
31

However, even if CGG were not a “deemed owner,” CGG would qualify as an 

“actual owner of goods” based on its MCDL business activity. This provides 

an alternative basis for affirming the final judgment in full. 

A. CGG Qualifies as a “Deemed Owner.”

Under the third sentence of Section 171.1012(i), a taxpayer qualifies as 

a “deemed owner” if it “furnish[es] labor or materials to a project for the 

construction, improvement, remodeling, repair, or industrial maintenance . . 

. of real property.” Tex. Tax Code § 171.1012(i). A taxpayer engaged in such 

activity “is considered to be an owner of that labor or materials and may 

include the costs, as allowed by this section, in the computation of cost of 

goods sold.” Id.; see also 34 Tex. Admin. Code § 3.588(c)(8)(A)-(B) (same). 

The Comptroller agrees with the concept of “deemed ownership” but 

disputes whether CGG’s activities qualify. Appellants’ Brief, p.5, 44-45, 50.9 

As discussed below, CGG satisfies both elements of the deemed-owner test 

because (1) it furnishes labor or materials (2) in a manner that is sufficientlyconnected to a real-property improvement project. 

The deemed owner provision applies when a taxpayer does not actually 

own and sell “goods” as defined by subsection (a). The “labor or materials” 

furnished by the taxpayer is substituted in lieu of “ownership of goods.” In 

 

9 The Comptroller also disputes what costs are allowed for deduction upon 

qualifying as a deemed owner. We address this issue separately. Infra, Argument IV. 
32

Newpark, this Court recognized that the third sentence of subsection (i) 

would be rendered “meaningless” if the taxpayer had to actually own or sell 

goods to qualify for the COGS deduction as a deemed owner. Id. at 55. 

As an initial matter, the Comptroller did not challenge Findings of Fact 

8 and 9, which specifically state that CGG “furnishes labor” and “furnishes 

materials.” (CR.266). Nor did the Comptroller challenge Findings 2-4, 

which provide additional detail about the nature of CGG’s work, nor 

Findings 5-7 and 10, which confirm that CGG’s labor and materials are 

furnished for the purpose of oil and gas exploration and production. 

(CR.265-66). Relatedly, the Comptroller does not challenge Conclusion of 

Law 3, stating that “[o]il and gas wells constitute real property for purposes 

of [Section] 171.1012(i).” (CR.268). The unchallenged findings are binding 

on the Court because there is evidence in the record to support them, as 

described below. The judgment should be affirmed because Conclusions of 

Law 1 and 4 (concluding that CGG is eligible for the COGS deduction as a 

deemed owner) stand on the basis of these findings. Supra, Standard of 

Review II. 

1. CGG furnishes labor and materials. 

The first element to qualify as a deemed owner is that the taxpayer 

“furnish labor or materials.” Tex. Tax Code § 171.1012(i). A taxpayer is not 
33

required to furnish both labor and materials to qualify as a deemed owner; 

either will suffice. Id. However, CGG furnishes both, and the judgment can 

be affirmed on either ground standing alone. 

a. Labor. 

Section 171.1012 does not define “labor.” This Court addressed the 

meaning of that term in Newpark, 422 S.W.3d at 56, which likewise involved 

a taxpayer’s activities related to the production of oil and gas. “‘Labor’ is a 

broad term that encompasses a wide range of activities, including 

‘expenditure of physical or mental effort especially when fatiguing, difficult, 

or compulsory.’” Newpark, 422 S.W.3d at 56 (quoting Webster’s Third New 

International Dictionary 1259, 2075 (Phillip Gove Ed. 2002)). Because 

nothing in the statutory text indicates that “labor” for purposes of the COGS 

deduction has “a more limited meaning than its common definition,” this 

Court “presume[d] that the legislature intended to allow taxable entities to 

deduct a wide range of labor expenses.” Id. Under this definition, the postdrilling “transport and disposal of [] used drilling mud and other waste 

material” qualified as “labor.” Id. at 55, 57. 

Just as in Newpark, CGG’s acquisition and production of seismic data 

and images satisfies the meaning of “labor” under Section 171.1012(i). As 

detailed in Statement of Facts I.A, CGG employs large crews to create sound 
34

waves using specialized materials and equipment. CGG’s workers travel to 

and spend a considerable amount of time at the physical locations where 

their customers intend to construct wells for the production of oil and gas. 

The work required to acquire seismic data on these project sites is intense 

and requires specialized skills, such as drilling holes, blasting large swaths of 

dynamite, driving thousands of geophones into the earth, shaking the earth 

with a series of 60,000 to 90,000 pound vibrating trucks, and/or shooting 

an array of large airguns into the sea and through the ocean floor to create 

seismic sound waves. The second step of producing or processing seismic 

data likewise requires a hefty expenditure of effort, albeit more mental than 

physical. Here, highly-trained workers apply complicated algorithms and 

geophysical concepts, using specialized hardware and software. In total, 

this requires several months to several years of work. 

CGG’s activities constitute the “expenditure of physical or mental 

effort.” The efforts regarding both the acquisition of data and production of 

seismic images are difficult, fatiguing, and require specialized skills. Thus, 

CGG’s activities satisfy the meaning of “labor” under Section 171.1012(i). 

b. Materials. 

The meaning of “materials” is not defined by Section 171.1012, was not 

at issue in Newpark, and has not otherwise been addressed by any appellate 
35

court in the context of the COGS provision. As with “labor,” nothing in the 

statutory text indicates an intention for the term “materials” to have any 

narrower of a meaning than its common definition. See Tex. Tax Code 

§ 171.1012(i). The common meaning of “material” is “elements, constituents, 

or substances of which something is composed or can be made.” MerriamWebster’s Collegiate Dictionary 765 (11th ed. 2012). The definition also 

includes, “something (as data) that may be worked into a more finished 

form.” Id. 

CGG furnishes materials in the form of dynamite, geophones, airguns, 

cables, trucks, batteries, and other miscellaneous parts used to create sound 

waves for the acquisition of seismic data, as well as the ultimate seismic data 

or images provided for use in the exploration and production of oil and gas. 

Supra, Statement of Facts I.A. These items satisfy the common meaning of 

materials as used in Section 171.1012(i). 

c. The Comptroller’s categorical attempt to separate

“labor and materials” from “geological and 

geophysical” work misinterprets the statute.

The Comptroller attempts to categorically dismiss the labor and 

materials furnished by CGG with a contrived argument that CGG’s activity 

cannot be “labor or materials” because subsection (c) contains separate 

provisions for “geological and geophysical costs” versus “labor” and 
36

“material” costs. Appellants’ Brief, p.45-49. This argument fails for multiple 

reasons. 

Section 171.1012(c) provides in relevant part: 

The cost of goods sold includes all direct costs of 

acquiring or producing the goods, including: 

(1) labor costs; 

(2) cost of materials that are an integral part of 

specific property produced; 

(3) cost of materials that are consumed in the 

ordinary course of performing production 

activities; . . . [and] 

(10) geological and geophysical costs incurred to 

identify and locate property that has the 

potential to produce minerals. 

Tex. Tax Code § 171.1012(c). 

As an initial matter, the Comptroller claims—without any citation to 

the record—that the trial court “reject[ed]” CGG’s “argument that it was 

entitled to a COGS deduction under § 171.1012(c)(10).” Id., p.45. This 

represents a factual misunderstanding of what happened at trial, and it 

relates to the Comptroller’s legal misunderstanding of how Section 171.1012 

operates. Infra, Arguments II, IV. CGG did not argue that it “qualifies” for 

the COGS deduction on the basis of subsection (c)(10). Rather, it claimed 

that having qualified for the deduction as an actual or deemed owner under 
37

subsection (i), it is entitled to deduct all of its incurred costs as allowed by 

subsections (c), (d), and (f), including the costs specified under (c)(10). 

(2.RR.41-43; 3.RR.103, 155-56; CR.84). 

The record conclusively demonstrates that the trial court accepted 

CGG’s argument that it was entitled to deduct the costs it incurred under 

subsection (c)(10) and all other subcategories of CGG’s proven costs. CGG’s 

tax director (Listya Diyah) testified about the costs incurred by CGG under 

subsection (c)(10), and two exhibits provide a breakdown of these costs. 

(3.RR.55-56; 4.RR.P.Ex.19, 48). This was sufficient evidence for the trial 

court to find that CGG’s calculation included approximately $674 million10 in 

subsection (c) costs (the total shown on CGG’s exhibits, including the full 

amount of its (c)(10) costs), and to conclude that “[e]ach of the costs that 

CGG included in its [COGS] deduction were allowed by [subsections] (c), (d), 

and (f),” and that “CGG is entitled to claim [the total amount of its COGS 

deduction] for Report Year 2008.” (CR.267-68 at FOF.15, COL.8-9). The 

trial court could not have made these determinations if it “rejected” CGG’s 

ability to include the (c)(10) costs in its COGS deduction. Moreover, Finding 

 

10 The amount of subsection (c) costs is higher than CGG’s total COGS amount of 

$567 million because the total calculation includes approximately $1.2 million in intragroup eliminations, per the combined-reporting rules under Section 171.1014. (CR.267 

at FOF.15(d)). 
38

15 is binding on this Court because the Comptroller has not raised a 

sufficiency challenge to it, and it is supported by the record. 

The Comptroller’s categorical argument also misinterprets the 

statutory text by conflating a description of activities with the costs incurred 

to perform certain activities. See Appellants’ Brief, p.46. Subsection (i) 

refers to the activities required for a taxpayer to qualify as a deemed owner of 

goods: furnish labor or materials. Tex. Tax Code § 171.1012(i). As discussed 

above, the statute does not limit the meaning of “labor” or “materials” 

beyond their broad, common definitions. Subsection (c) describes thirteen 

categories of direct costs that may be deducted by a taxpayer who qualifies 

under subsection (i). Id. § 171.1012(c). 

Notably, this list is written in inclusive rather than exclusive terms. 

“‘Includes’ and ‘including’ are terms of enlargement and not of limitation or 

exclusive enumeration, and use of the terms does not create a presumption 

that components not expressed are excluded.” Sneed v. Webre, No. 12-0045, 

2015 WL 3451653, *14 (Tex. May 29, 2015) (citing Tex. Gov’t Code 

§ 311.005(13)). The list begins by identifying broad categories, such as the 

descriptions of general labor and material costs in (c)(1)-(3), and then 

delineates more industry-specific costs such as those in (c)(10). That does 

not mean a taxpayer who deducts costs under (c)(10) is prohibited from also 
39

deducting costs under (c)(1)-(3). Instead, all categories are “included” as 

examples of the types of direct costs allowed for deduction by qualifying 

taxpayers. Subsection (c)(10) is not rendered meaningless by this 

interpretation. 

This broad allowance of deductible costs does not limit the meaning of 

the underlying activities. Just because a taxpayer incurs costs “to identify 

and locate property that has the potential to produce minerals” does not 

prohibit a conclusion that the taxpayer has also “furnished labor and 

materials.” It would be illogical to conclude that a taxpayer who performs 

“geological and geophysical” work never “furnishes labor or materials” as 

part of that work. Stated another way, the activity of performing “geological 

and geophysical work” is not mutually exclusive of “furnishing labor or 

materials,” and vice-versa. 

To the contrary, the statute’s express allowance of deductions for 

oilfield related costs, such as intangible drilling costs and geological and 

geophysical costs informs the court of the types of activities contemplated as 

those eligible for COGS. Under the Comptroller’s analysis, oil and gas 

drilling contractors would not be eligible to claim COGS for the reason that 

their costs include, by and large, intangible drilling costs, which the statute 

expressly allows under subsection (c)(7). 
40

d. The Comptroller’s argument that CGG’s work is a 

“service” that is not “fatiguing, difficult, or 

compulsory” enough to constitute “labor” is an 

improper recast of its previously-rejected “physical 

change” theory. 

The Comptroller next argues that CGG’s work does not constitute 

“labor” because it is a “service” that is “sophisticated—not fatiguing, difficult, 

or compulsory.” Appellants’ Brief, p.47. This argument misreads Newpark, 

ignores evidence in the record, and is merely a repackaged version of the 

Comptroller’s prior “physical change” argument, which has been twice 

rejected by this Court and publically-abandoned by the Comptroller. 

As here, the Comptroller argued in Newpark that NES’s transport and 

disposal of used drilling waste were “clearly a service and not labor supplied 

for the improvement of real property.” 422 S.W.3d at 56-57. This Court 

rejected the argument, holding that that the meanings of “service” and 

“labor” are not “mutually exclusive,” and “the[ir] ordinary definitions . . . 

substantially overlap such that both definitions tend to refer to the words 

interchangeably.” Id. at 54. Notably too, certain “service” costs are expressly 

allowed for deduction under subsection (f), showing the Legislature’s intent 

that aspects of “service” can be provided as part of “furnishing labor or 

materials.” Tex. Tax Code § 171.1012(f); (3.RR.73, acknowledged by auditor 

Dullum). Hence, although an activity may have attributes of “service,” that 
41

does not holistically prevent it from constituting “labor.” CGG’s activity 

qualifies as labor just as NES’s did.

Moreover, Newpark does not hold that a taxpayer’s activities are 

absolutely required to be “fatiguing, difficult, or compulsory” to satisfy the 

meaning of “labor.” Newpark holds that it will be “especially” clear that a 

taxpayer’s efforts qualify as labor where any one of those (or presumably 

similar) characteristics are present. 422 S.W.3d at 56. Newpark also holds 

that “mental” effort can satisfy the definition of labor—it does not have to be 

physical effort. Id. Granted, at some point, activities become “too far 

removed” from a real-property construction project to qualify under Section 

171.1012(i). Infra, Argument III.A.2. Nevertheless, Newpark does not 

create a bright-line test that efforts must be “physical,” nor that they must be 

“fatiguing, difficult, or compulsory” to qualify. In any event, the record 

demonstrates that CGG’s activities satisfy the definition as described in 

Newpark. Supra, Argument III.A.1. 

At trial, the Comptroller’s auditor, Gary Dullum, testified that the only 

reason he denied CGG the COGS deduction was because he considered CGG 

a “service provider” rather than the actual driller/producer of minerals. 

(3.RR.84-85). Dullum’s misunderstanding apparently arose from the 

Comptroller’s training that, to qualify for the COGS deduction as a “deemed 
42

owner” of goods under Section 171.1012(i), a taxpayer must “physically work 

[on] and effect a change” to real property. (3.RR.88-89). 

The Comptroller’s corporate representative, Sarah Pai, confirmed it 

was the agency’s “litigation position and . . . policy . . . that an entity must 

physically work on and effect a change to real property in order to be entitled 

to take the [COGS] deduction available under 171.1012(i).” (4.RR.P.Ex.46, 

p.31). She also confirmed that the only reason the Comptroller concluded 

CGG does not qualify as a deemed owner under Section 171.1012(i) is 

“because [CGG is] not physically working on the property and making a 

change.” (Id., p.46). She acknowledged that CGG is “physically present on 

the property and they’re working,” but claimed the “element they fail is that 

work does not effect a physical change.” (Id., p.174; see also 2.RR.64; CR.61-

62). 

After trial, the Comptroller publically-abandoned its “physical change” 

argument in recognition of the fact that this Court has repeatedly rejected it. 

In a June 2014 memorandum, the Comptroller’s office stated:

Based on the [Third Court’s] language and 

analysis in TITAN and NEWPARK, we are revising the 

policy with regard to subcontracting payments eligible 

for . . . deduction under Section 171.1012(i). . . .11

 

 

11

 Although this memorandum changed the Comptroller’s internal policy, it did not 

establish a formal rule in the absence of public notice and comment. See Tex. Gov’t 

Code Ch. 2001 (Administrative Procedure Act regarding notice and comment 

rulemaking). 
43

[W]e are expanding the interpretation of what is 

considered to be furnishing labor or materials to a 

[real property project] . . . and will no longer require 

an entity to actually physically touch the property or 

make a change to the property to qualify for the COGS 

deduction. . . . 

Texas Comptroller of Public Accounts, Memorandum from Tax Policy 

Division, 201406920L (June 10, 2014) (STAR document available at 

http://cpastar2.cpa.state.tx.us/index.html) (emphasis added). This “change 

has immediate effect and a taxable entity may file an amended franchise tax 

report for years that are open within the statute of limitations.” Id. Thus, 

the change has retroactive application and must be applied to CGG in this 

case. 

Despite this announcement, the Comptroller’s Brief returns to the 

same theory and underlying principles of the “physical change” argument, 

and simply recasts them as CGG’s activities being too “sophisticated” and 

“service” oriented, and not physically demanding (“fatiguing, difficult, or 

compulsory”) enough to be considered “labor.” See Appellants’ Brief, p. 25-

26, 28-32, 47. Ultimately, this is the same argument, and it fails for the same 

reason: None of these requirements are contained within the plain statutory 

text requiring the taxpayer to “furnish labor or materials.” If the Legislature 

wished to limit the provision to entities actually performing construction or 
44

other physical labor or affecting a physical change onsite, it would have left 

out the words “or materials” and “to a project,” which expand the scope of 

the provision. 

Moreover, Section 171.1012(i) explicitly applies to entities furnishing 

labor or materials to a project for the industrial maintenance of real 

property, which is outside the scope of normal activity for a “construction 

company” and often would not result in any physical change to the property. 

Auditor Dullum admitted this. (3.RR.75). 

e. The Comptroller’s two-sentence argument regarding 

“materials” is unavailing. 

Beyond the Comptroller’s attempt to categorically dismiss CGG’s 

“furnishing of labor or materials,” his only argument for why CGG does not 

furnish materials is confined to two sentences without supporting legal or 

factual analysis. Appellants’ Brief, p.47. The Comptroller argues that CGG’s 

seismic data is not “consumed” in the drilling process. Id. To any extent this 

argument has been adequately briefed for preservation under Texas Rule of 

Appellate Procedure 38.1(i), it fails. 

The Comptroller overlooks many of the other materials furnished by 

CGG beyond its seismic data, and the Comptroller utilizes an overly-narrow 

definition of “materials.” Supra, Argument III.A.1.b. The Comptroller relies 

on Section 171.1012(c)(3), which allows deductions for the “cost of materials 
45

consumed in the ordinary course of performing production activities.” To 

any extent this cost category describes one type of material that could be 

furnished under subsection (i), it does not do so exclusively. The meaning of 

“materials furnished” is broader than the specific categories of material costs 

that can be deducted. Moreover, our supreme court has held that 

“consumption” of materials is not required to establish that they were 

“furnished” for purposes of a materialman’s lien. Houston Fire & Cas. Ins. 

Co. v. Hales, 279 S.W.2d 389, 392 (Tex. Civ. App.—Eastland 1955, writ ref’d

n.r.e.) (citing W. L. MacAtee & Sons v. House, 153 S.W.2d 460 (Comm’n of 

App. adopted by Sup.Ct.)).

2. CGG’s activities are sufficiently connected to a realproperty improvement project. 

To qualify for the COGS deduction as a deemed owner, the labor or 

materials furnished by the taxpayer must be “to a project for the 

construction, improvement, [etc.] of real property.” Tex. Tax Code 

§ 171.1012(i). “It is undisputed that the drilling and construction of oil and 

gas wells qualifies as construction or improvement to real property.” 

Newpark, 422 S.W.3d at 55; (see also 4.RR.P.Ex.46, p.115). Thus, the only 

question is whether CGG’s activities are sufficiently connected to projects for 

the drilling and construction of oil and gas wells. 
46

In Newpark, this Court did not create a bright-line test. Instead, it 

held that satisfaction of this standard must be on a case-by-case basis. Id. at 

56-57. There, the Court held that NES’s waste-disposal activity qualified 

based on three considerations. One, “it is difficult to view [the activity] as 

though it were not an essential and direct component of the drilling process.” 

Id. at 56. Two, the Legislature indicated that such activity should qualify by 

allowing deduction of “similar costs for scrap material and pollution control 

devices.” Id. And three, the evidence demonstrated that drilling activity 

could not continue without the waste removal and disposal activities 

provided by NES. Id. 

CGG’s activity is likewise sufficiently connected to oil and gas drilling 

projects. In light of the uncontroverted testimony of Bob Montgomery and 

the contractual agreements stating that CGG’s acquisition and production of 

seismic data is an integral part of the customer’s drilling business, and 

considering the millions of dollars E&P companies are willing to pay for this 

critical work, it is difficult to view CGG’s activity as though it were not an 

essential and direct component of the drilling process. Supra, Statement of 

Facts I.B. 

Second, the Legislature indicated that such activity should qualify by 

specifically allowing deduction of “geological and geophysical costs incurred 
47

to locate property that has potential to produce minerals.” See Tex. Tax 

Code § 171.1012(c)(10). Contrary to the Comptroller’s argument, this 

category of costs expands upon rather than limits the type of labor and 

materials that should qualify under subsection (i). Supra, Arguments 

III.A.1.c, IV.B. 

Third, the record demonstrates that drilling activity could not 

commence—or at least not do so successfully or in a manner that efficiently 

locates all producible mineral reserves—without the seismic data “blueprint” 

furnished by CGG. Supra, Statement of Facts I.B. These considerations 

sufficiently support the trial court’s conclusion that CGG furnishes labor or 

materials to a real-property construction or improvement project. 

The Comptroller argues that CGG’s activities are “too far removed” 

because its customer’s drilling projects are only “potential” not “actual.” 

Appellants’ Brief, p.50-52. This argument reads words into the statute and 

ignores important evidence in the record. Nothing in the statute specifies 

the status of when a project “officially” begins, nor does the statute 

definitively require that the labor or materials be furnished to only one 

project rather than several. See Tex. Gov’t Code § 311.012(b) (In construing 

statutes, “[t]he singular includes the plural and the plural includes the 

singular.”). 
48

Before CGG begins working with a proprietary customer, the customer 

has already done a substantial amount of “macro geology” to identify the 

general location they want to drill and have established lease rights on that 

location to enable drilling once the minerals are located by CGG’s seismic 

data. Supra, Statement of Facts I.C. Moreover, the customer is far enough 

into the project to specify the parameters of work for CGG, and they remain 

actively involved with CGG throughout the timeline of its work. Id. 

Sometimes a customer has gone so far as to obtain initial seismic data for 

CGG to process. This is sufficient evidence from which the trial court could 

conclude that CGG furnishes labor and materials “to a project.”

In regard to CGG’s MCDL customers, CGG does not begin the process 

of acquiring and producing seismic data in any location unless it is “hot” 

with interest by several E&P companies to drill there. Supra, Statement of 

Facts I.D. It would be far too costly of CGG to do otherwise. (See

5.RR.D.Ex.14, p.23-24: stating CGG’s policy of generally requiring a certain 

number of “pre-commitments” from customers before beginning the 

acquisition of MCDL data). Thus, at a minimum, the MCDL data is acquired 

and produced “for a project” that is reasonably anticipated to occur. 

Sometimes, customers approach CGG to shoot a specific area, akin to a 

proprietary customer but with a trade-off of less cost for non-exclusive 
49

rights. (3.RR.19; 5.RR.D.Ex.36, p.12). Moreover, by the time customers are 

able to buy licenses “off the shelf,” they are presumably doing so for projects 

that are underway. 

The Comptroller’s arguments that CGG’s seismic data does not qualify 

because it may indicate where not to drill, or because the drilling may not 

ultimately be successful, or because drilling may not occur in the same tax 

year, are all red herrings. Determining where to drill and not to drill are 

equally essential components of the project. Just because a customer may 

review the seismic map and decide to not drill in location A, but to instead 

drill in location B, or to avoid a dangerous blowout and not drill at all, does 

not mean CGG failed to furnish labor or materials “to a project.” 

Furthermore, nothing in the statute requires that a taxpayer maintain books 

and records that would somehow trace and parse its costs by the dates and 

ultimate successes of the customers’ drilling projects. Such an argument 

ignores the economic realities of business in direct contravention to the 

Texas Supreme Court’s holding in Combs v. Roark Amusement & Vending, 

L.P., 422 S.W.3d 632, 637 (Tex. 2013). 

In Newpark the Comptroller vehemently argued NES’s activities were 

nothing more than that of a “garbage collector,” which was clearly a service 

and not the furnishing of labor or materials to a project for the construction 
50

or improvement of real property. 422 S.W.3d at 55-57. Now, the 

Comptroller argues the opposite, contending that NES’s transporters “must 

rely heavily on human effort,” and that “mov[ing] drilling mud toward or 

away from an existing project site” is a qualifying activity. Appellants’ Brief, 

p.47, 51. Just as the Comptroller maintained an unreasonable argument for 

years against Newpark, the Comptroller does so here against CGG. CGG 

qualifies as a deemed owner for the COGS deduction just as NES/Newpark 

did, and the Comptroller’s attempts to distinguish that case are unavailing. 

B. CGG Qualifies as an “Actual Owner.” 

Alternatively, CGG qualifies for the COGS deduction as an actual 

owner of goods (i.e., an owner “based on all of the facts and circumstances, 

including the various benefits and burdens of ownership vested with the 

taxable entity”). See Tex. Tax Code § 171.1012(i), second sentence. Through 

its MCDL, CGG sells goods in the ordinary course of business. 

1. CGG owns and sells seismic data. 

There is no dispute that CGG owns the seismic data it licenses through 

its MCDL. (2.RR.123-24; 5.RR.D.Ex.36, p.13, 17, 19). The Comptroller also 

does not dispute that CGG’s licensing of seismic data constitutes a “sale.” 

See TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 442 (Tex. 

2011) (because the revenues from licensing seismic data derive from 
51

conveyance and use of the underlying data, whereas the license itself is not a 

“revenue-producing asset,” the transaction constitutes a “limited sale” of 

property)12; see also Avis v. First Nat. Bank of Wichita Falls, 174 S.W.2d 

255, 258 (Tex. 1943) (“This Court has definitely declared that an oil and gas 

lease is the same as a sale of real estate.”). 

2. The seismic data is a “good” for purposes of the COGS 

deduction. 

The only dispute regarding CGG’s qualification as an “actual owner” is 

whether the products sold by CGG satisfy the relevant definition of “goods.” 

See Appellants’ Brief, p. 25-41. CGG qualifies because the seismic data that 

it intends to license for mass distribution without substantial alteration 

through its MCDL satisfies a unique definition of “goods” applicable only to 

the COGS deduction. See id. § 171.1012(a)(3)(A)(ii). 

“Goods” are defined to mean “real or tangible personal property sold in 

the ordinary course of business of a taxable entity.” Tex. Tax. Code 

§ 171.1012(a)(1); see also 34 Tex. Admin. Code § 3.588(b)(3) (same). The 

legislature has defined three categories of property that shall be treated as 

“tangible personal property” exclusively for purposes of the COGS deduction: 

 

12 The tax issue involved in TGS-NOPEC was “apportionment.” See Tex. Tax Code 

§ 171.103. Although the nature of the transaction (i.e., the licensing of seismic data) 

should be consistently construed as a “sale” of property for purposes of both the COGS 

deduction and apportionment, the nature of the property is treated differently for these 

two purposes, as explained below. 
52

(a) In this Section: . . . 

(3)(A) “Tangible personal property” means:

(i) personal property that can be seen, 

weighed, measured, felt, or touched or that is 

perceptible to the senses in any other manner; 

(ii) films, sound recordings, videotapes, live and 

prerecorded television and radio programs, books, and 

other similar property embodying words, ideas, 

concepts, images, or sound, without regard to the 

means or methods of distribution or the medium in 

which the property is embodied, for which, as costs are 

incurred in producing the property, it is intended or is 

reasonably likely that any medium in which the 

property is embodied will be mass-distributed by the 

creator or any one or more third parties in a form that is 

not substantially altered; and 

(iii) a computer program, as defined by Section 

151.0031. 

Tex. Tax Code § 171.1012(a)(3)(A)(i)-(iii); see also 34 Tex. Admin. Code 

§ 3.588(b)(10)(A) (same). By using the language “In this Section”, the 

statute confined this specialized definition of ‘[t]angible personal property’

to Section 171.1012. In doing so, it excluded all other forms of (i) intangible 

property and (ii) services as being outside the definition of “goods” for 

purposes of the COGS deduction. Tex. Tax Code § 171.1012(a)(3)(B); see also

34 Tex. Admin. Code § 3.588(b)(10)(B) (same). 
53

The first category covers property that is traditionally thought of as 

“tangible”: items that “can be seen, weighed, measured, felt,” etc. Tex. Tax. 

Code § 171.1012(a)(3)(A)(i). Neither party argues that CGG’s seismic data 

satisfies the first category.13

The second two categories cover property that is, in reality, 

“intangible” (i.e., not of physical form). Id. § 171.1012(a)(3)(A)(ii)-(iii). 

Nevertheless, for the particular tax purpose of allowing a COGS deduction, 

our Legislature has chosen to specially define or treat these specific types of 

intangible property as “tangible personal property” (TPP). (See 3.RR.106). 

It is a legal fiction employed to serve a special purpose—the allowance of a 

deduction for high-cost industries important to the State that do not 

otherwise produce traditionally “tangible” products. As such, categories (ii) 

and (iii) constitute “artificial TPP” solely for purposes of the COGS 

deduction. See TGS-NOPEC, 340 S.W.3d at 443 & n.11 (noting that Texas 

legislature and other state legislatures are able to and have chosen to identify 

certain types of intangible property for specialized tax treatment). 

 

13 Consequently, the outcome of this case is not controlled by American MultiCinema, Inc. v. Hegar, No. 03-14-00397-CV, --S.W.3d --, 2015 WL 1967877, *6 n.4 

(Tex. App.—Austin Apr. 30, 2015, no. pet. h.). 
54

a. TPP for COGS is different than TPP for sales tax or 

apportionment. 

It is important to understand the distinctions between TPP as defined 

for purposes of (1) the COGS deduction versus (2) the Texas sales and use tax 

and (3) the franchise tax code’s apportionment provision, which also employ 

the term “tangible personal property.” See Tex. Tax Code § 151.009, 

§ 171.103. The Comptroller overlooks these distinctions and improperly 

conflates authorities interpreting the relevant statutes. 

This matters for two reasons. First, the authorities relied on by the 

Comptroller to characterize CGG’s seismic data as “intangible” are based on 

sales tax or apportionment principles and, thus, do not control for purposes 

of the COGS deduction. See Appellants’ Brief, p.32-34. Second, the Court 

should be aware of the implications of characterizing property as “tangible” 

or “intangible” under these various statutes. Generally speaking, sales of 

“tangible” personal property are subject to sales tax, and revenues from such 

sales are apportioned by the location of use for franchise tax purposes, while 

sales of “intangible” property are not subject to sales tax, and their revenues 

are apportioned by the location of payor. See TGS-NOPEC Geophysical Co, 

v. Combs, 340 S.W.3d 432 (Tex. 2011). Because CGG has pending 

administrative claims regarding its apportionment factor, the Court’s 

discussion and holdings here should be limited to the treatment of CGG’s 
55

seismic data for purposes of the COGS deduction and not inadvertently 

result in an advisory opinion about its treatment for apportionment 

purposes. 

The definitions of “goods” and “tangible personal property” in Section 

171.1012(a) are expressly limited to application “in this section.” Comptroller 

representative Sarah Pai agreed that “in this section” as used in Section 

171.1012(a) refers exclusively to the COGS provision and not to the franchise 

tax code generally. (4.RR.P.Ex.46, p.120-21). She unequivocally agreed that 

the phrase “in this section” “confine[s] the[] definitions [provided under 

Section 171.1012(a)] to Section 171.1012 and [they] don’t extend into the 

apportionment rule.” (Id., p.128). On this basis, Pai further agreed that “if 

an item qualifies . . . as tangible personal property under (ii) of Section 

171.1012[(a)(3)(A)], it is still correct to apportion that as an intangible, the 

sale of an intangible because the words ‘in this section’ confine the scope of 

those definitions to that Section 171.1012.” (Id., p.128-29). 

For purposes of sales tax, TPP is defined as “property that can be seen, 

weighed, measured, [etc.]” and “includes a computer program and a 

telephone prepaid calling card.” Tex. Tax Code § 151.009. Thus, the 

definition overlaps with categories (i) and (iii) of TPP under the COGS 
56

definition but notably leaves out category (ii), regarding the intellectual 

property at issue here. 

The apportionment provision does not define TPP. See Tex. Tax Code 

§ 171.103. However, the legislative history indicates a parallel treatment of 

TPP for purposes of sales tax and apportionment, distinct from the 

treatment of TPP for COGS purposes. The apportionment rules have 

remained largely unchanged since their amendment in 1997—a date when 

the Texas sales tax existed but vastly pre-dating the 2006 enactment of the 

current franchise tax. Because apportionment does not impact the 

calculation of one’s tax base, no major changes were made to that provision 

when the Legislature adopted the margin/franchise tax. 

Considering that (1) the COGS provision did not even exist until a 

decade after the current apportionment provision was enacted, (2) no 

relevant change was made to apportionment upon adoption of the COGS 

provision, and (3) the legislature expressly limited the definition of TPP for 

purposes of COGS—it is not logical to conclude that the legislature intended 

for the meaning of TPP for apportionment purposes to be the same as for 

COGS purposes. Rather, it is more logical to interpret the meaning of TPP in 

the apportionment and sales tax rules consistently, with the important 
57

distinction for COGS purposes being the intellectual property described by 

Section 171.1012(a)(3)(A)(ii). 

Under this analysis, CGG agrees that for purposes of sales tax and 

apportionment—which do not include “sound recordings, film, . . . and other 

similar property” in their definitions of TPP—its seismic data should be 

treated as “intangible” property. See TGS-NOPEC, 340 S.W.3d at 444. 

However, that does not prevent the seismic data from qualifying as a “good” 

for purposes of the COGS deduction because the Legislature chose to treat 

this specific type of otherwise intangible property as a form of “artificial 

TPP” exclusively for this purpose, and CGG’s seismic data satisfies the 

applicable definition. 

b. CGG’s seismic data satisfies the definition in Section 

171.1012(a)(3)(A)(ii). 

Section 171.1012(a)(3)(A)(ii) treats “films, sound recordings, . . . and 

other similar property” (i.e., intellectual property that is otherwise 

intangible) as an artificial form of TPP for purposes of the COGS deduction. 

CGG’s seismic data satisfies each element of the (A)(ii) definition because: 

(1) seismic data is the type of intellectual property described therein; and (2) 

at the time CGG incurs the costs to produce the data, CGG intends to mass 

distribute it (3) in a form that is substantially unaltered, regardless of the 
58

means or methods of distribution or the medium in which it is distributed. 

See Tex. Tax Code § 171.1012(a)(3)(A)(ii). 

First, CGG’s seismic data falls within the statute’s broad definition of 

intellectual property. The Legislature provided an expansive list, drafted in 

non-exclusive terms, of the types of property that qualifies, described by 

both type and characteristic: “films, sound recordings, videotapes, live and 

prerecorded television and radio programs, books, and other similar 

property embodying words, ideas, concepts, images, or sound.” CGG’s 

seismic data is “similar” to the described types of visual and sound 

recordings, which convey unique information that could not be organically 

duplicated by another creator. 

The Comptroller claims that CGG’s seismic data “is nothing like the 

items listed” because it lacks “esthetic, narrative, musical, or artistic value.” 

Appellants’ Brief, p.40. This aligns with the Comptroller’s trial argument 

that the property had to be “creative” and could not be “scientific” to qualify 

under Section 171.1012(a)(3)(A)(ii). (3.RR.120; 4.RR.P.Ex.46, p.149, 158). 

Nothing in the statute expressly or impliedly limits the definition in the 

manner sought by the Comptroller. And, as the Comptroller’s counsel 

acknowledged regarding this theory, “I can’t prove it. I don’t have a 

precedent for you.” (3.RR.154). Moreover, this argument would disqualify 
59

producers of documentaries from claiming the COGS deduction. Nothing in 

the language of the statute supports such a narrow reading. 

Second, the record demonstrates that CGG intends to mass distribute 

the seismic images at the time it incurs the costs to produce them. CGG does 

not even consider undertaking the expense of funding the production of

seismic images for purposes of the MCDL unless there is substantial interest 

by E&P companies for the geological information of a particular location. 

(2.RR.118, 121; 4.RR.P.Ex.18; 5.RR.D.Ex.14, p.16: “In developing our multiclient data library, we carefully select survey opportunities in order to 

maximize our return on investment.”). The entire purpose of CGG incurring 

these costs is to sell the data to “as many people as possible,” including all 

12,000 of the Texas companies registered in the oil and gas drilling industry. 

(2.RR.118-20, 125; 3.RR.13, 17, 20; 4.RR.P.Ex.18; 4.RR.P.Ex.25; 

5.RR.D.Ex.35, p.8, 12-13, 16-17). Comptroller representative Pai admitted 

that the “mass distribution” requirement is satisfied by a taxpayer’s intent to 

mass distribute, not its ability to actually do so: She agreed a taxpayer would 

qualify if it “intended to sell to as many people as possible [but] no one 

bought it.” (4.RR.P.Ex.46, p.157). On this record, the Comptroller cannot 

satisfy his burden of demonstrating that there is “no evidence” to support 
60

Findings of Fact 12-13, especially when the evidence is viewed in favor of the 

judgment. See City of Keller v. Wilson, 168 S.W.3d 802, 807 (Tex. 2005). 

The Comptroller defines “mass” as “a large number of individuals,” yet 

claims CGG’s intent to license its MCDL products to all 12,000 industry 

members is not enough. To the extent this argument is based on a belief that 

a taxpayer must intend to distribute its product to masses “of the general 

public” rather than a specific industry, this argument fails. Nothing in the 

statute provides such a limitation, and it is easy to understand how it would 

not be true for many types of niche musical or artistic products that the 

Comptroller admits qualify under Section 171.1012(a)(3)(A)(ii).14

The Comptroller’s remaining two “mass distribution” complaints are 

red herrings. Appellants’ Brief, p.38. First, just as discussed in regard to 

why CGG’s activities are sufficiently connected to drilling projects, the 

statute does not require a taxpayer to maintain accounting records and parse 

its costs based on the timing or success of a project. This argument should 

be rejected because it ignores the economic realities of CGG’s business. 

 

14 The Comptroller argues that CGG’s sales to proprietary customers do not satisfy 

the “mass distribution” prong. Appellants’ Brief, p.37. CGG has never argued that it 

qualifies as an “actual owner” of goods based on its proprietary sales. But contrary to 

the Comptroller’s argument, this does not provide a basis to reverse the judgment. It is 

only necessary that CGG qualify to claim the COGS deduction under subsection (i) as an 

actual or deemed owner of goods based on some aspect of its business. Then, as a 

combined group making a single election for which deduction method to apply, CGG is 

entitled to deduct all of its allowable costs. Infra, Argument IV.B. 
61

Supra, Argument III.A.2. Second, the Comptroller’s claim that “[o]ne would 

not expect data . . . regard[ed] as a ‘trade secret’ to be mass distributed” 

misses the point.15 CGG’s MCDL products are sold on a non-exclusive basis 

to whomever will pay for them. Just because the purchaser is prohibited 

from re-distributing those products (as is the purchaser of a copy of any 

movie, song, or image described by this section) does not show a lack of 

intent for the owner/seller of the product to mass-distribute it for profit. 

Third, CGG intends to distribute the data in a form that is substantially 

unaltered. Here, it is critical to understand the difference between altering 

the underlying data versus providing that data by various means or on 

various mediums. The underlying data (originally captured as sound waves 

from the earth’s surface) never changes. Only its format changes. By 

applying algorithms and other techniques to interpret the underlying data, 

CGG is able to make that same data (originally captured as a sound 

recording) appear in the medium of a high-resolution image. 

This is no different than taking the underlying text of a Shakespeare 

play, originally written with ink and paper, and reprinting it for sale as a 

hardback book, and then as a digital version, or performing it as a play, or 

 

15 The Comptroller cites a case regarding a discovery dispute over the production of 

seismic data in a legal dispute, which is readily-distinguishable and has nothing to do 

with the treatment of such property as “tangible” or “intangible” for tax purposes. See 

In re Bass, 113 S.W.3d 735 (Tex. 2003). 
62

making it into a movie. The underlying content of Shakespeare’s work 

remains substantially unaltered regardless of the medium or means of 

distribution, and he (or his heirs or assignees) remain the owners of that 

underlying intellectual property. 

The statute expressly provides that a product will qualify as artificial 

TPP under Section 171.1012(a)(3)(A)(ii) “without regard to the means or 

methods of distribution or the medium in which the property is embodied,” 

and that the distribution can be intended in “any medium in which the 

property is embodied.” Comptroller representative Pai confirmed the 

purpose of the statute is to allow the taxpayer to distribute the product 

“through as many means as are - - are profitable to the distributer.” 

(4.RR.P.Ex.46, p.67; see also p.138-139 (agreeing that this was a reasonable 

interpretation as shown by 4.RR.P.Ex.34)). 

Based on the foregoing, the record sufficiently supports the conclusion 

that the seismic data products sold through CGG’s MCDL are “goods” or 

“artificial TPP” within the definition of Section 171.1012(a)(3)(A)(ii). As 

such, the Legislature has placed these products outside of the definition of 

“intangible property” for purposes of the COGS deduction. 
63

IV. ALL OF CGG’S COSTS ARE ALLOWED FOR THE COGS DEDUCTION. 

Once a taxpayer qualifies as an actual or deemed owner of goods under 

Section 171.1012(i), it is instructed to calculate its total costs of goods sold as

allowed “by this section,” including all of the direct and indirect costs 

allowed for deduction under subsections (c), (d), and (f). That is exactly the 

computation CGG performed to arrive at its COGS deduction of $567 

million. The trial court correctly concluded that CGG was entitled to claim 

the COGS deduction in this full amount. (CR.250-51, 268 at COL.8-9). 

For the first time on appeal, the Comptroller seeks to parse these costs 

between CGG’s lines of business (proprietary and MCDL), its activities 

(acquisition and processing), and/or the assorted categories of allowable 

costs under subsections (c), (d), and (f). Recognizing that it failed to 

preserve these arguments at trial, the Comptroller seeks a remand for a 

second bite at the apple to parse the amount of CGG’s deduction. Not only 

has this argument been waived, it is also legally incorrect and inconsistent 

with recent policy announced by the Comptroller. 

A. The Comptroller Waived Any Challenge to the Actual Costs 

Deducted. 

CGG provided evidence that classified all of the costs included in its 

COGS deduction into each of the categories allowed under Texas Tax Code 
64

Sections 171.1012(c), (d), and (f). (3.RR.40-41, 48-52, 54-56; 4.RR.P.Ex.19, 

48). The Comptroller limited its opposition to a holistic challenge of 

whether CGG qualified for the COGS deduction under Section 171.1012(i). 

The Comptroller preserved no argument that, assuming CGG qualifies, the 

specific costs included in its COGS calculation are not allowed for deduction 

(in whole or in part) under Section 171.1012(c), (d), or (f). (See 2.RR.16 

(Comptroller’s counsel conceded that he was “not even fighting [CGG] on [its 

costs], except as to whether they’re eligible for [the COGS deduction of] 

them.”); 3.RR.58-63, 91-98 (Comptroller’s counsel asked no questions of 

relevant witnesses to challenge the allowance of specific costs under 

subsections (c), (d), or (f)); 3.RR.98; 4.RR.P.Ex.3, p.P000128 (Comptroller’s 

auditor agreed that he “did not challenge any of the categories or the 

amounts that are reflected on [CGG’s COGS calculation spreadsheet]”); 

CR.41-66 (Comptroller’s trial brief raises no challenge to allowance of 

specific costs under subsections (c), (d), or (f))). 

Thus, the Comptroller has waived any challenge to which of CGG’s 

costs should be included in the calculation. The only question before this 

Court is the threshold issue of whether CGG qualified for the COGS 

deduction. Assuming that the Court agrees that CGG qualifies as an actual 

or deemed owner under Section 171.1012(i), then it should affirm the 
65

judgment in full allowing CGG the full amount of its COGS deduction. There 

is no legitimate basis for a remand in this circumstance. 

B. The Statute Does Not Require Parsing of Costs. 

The Comptroller agrees that taxpayers who qualify for the COGS 

deduction as “actual owners” may deduct any of the costs allowed by (c), (d), 

and (f). Appellants’ Brief, p. 44-45. However the Comptroller argues that 

taxpayers who qualify as “deemed owners” should be treated differently 

under the same provision. Id., p.19, 43-49 (arguing that deemed owners are 

entitled to deduct only their “labor and material costs” and not the 

remainder of costs allowed by subsections (c), (d), and (f)). This contravenes 

the plain language of the statute and ignores the Comptroller’s own 

admissions at trial. 

Regarding both “actual” and “deemed” owners, Section 171.1012(i) 

plainly states that the taxpayer may subtract the costs as provided “by” or 

“under” “this section.” Tex. Tax Code § 171.1012(i), first and third sentences. 

The reference to “this section” must mean the entirety of Section 171.1012 

because the Legislature did not say “subsection,” which it knew how to do if 

that is what had been intended. See generally Tex. Tax Code § 171.1012 

(containing 12 separate references to “subsections”). 
66

The Comptroller’s auditor, Gary Dullum, agreed that “as allowed by 

this section” means all of the costs under (c), (d), and (f). (3.RR.72-73). The 

Comptroller’s prior letter rulings also support this interpretation. 

(4.RR.P.Ex.28, ¶ 4: explaining that the taxpayer is entitled to deduct all costs 

allowed by 171.1012(c), (d), and (f), not just labor and material costs; 

4.RR.P.Ex.32: in regard to a deemed owner, explaining that “Section 

171.1012(c), (d), and (f) lists the types of costs included in the COGS 

deduction for all types of businesses.”). 

Additionally, nothing in the statute requires parsing of costs between 

business lines or activities. Instead, the taxpayer simply must qualify by 

some portion of its business activity to elect the COGS deduction under 

subsection (i), and then it may calculate all of the costs allowed by 

subsections (c), (d), and (e). This is equally true for single businesses as it is 

for integrated companies like CGG and Newpark, which report their taxes on 

a combined group basis, making a single election for the calculation method 

used. As this Court explained: 

[I]t would be inconsistent [with the statutory purpose] 

to treat subsection 171.1014(e)(1) [regarding combined 

reporting] as an additional substantive limitation that 

would require each member’s business activity to be 

viewed in complete isolation from the combined group. 

This conclusion is directly supported by subsection 

171.1014(d–1), which states that “[a] member of a 

combined group may claim as costs of goods sold those 
67

costs that qualify under Section 171.1012 if the goods for 

which the costs are incurred are owned by another 

member of the combined group.” As this provision 

indicates, a member that does not sell any goods itself 

may nevertheless deduct as cost of goods sold those 

expenses it incurs to sell goods owned by another 

member of the combined group. . . . 

It would be inconsistent with this framework to 

consider a combined group as a single taxable entity, 

require each member to take the same general 

deduction, but nevertheless treat each member as an 

isolated entity for purposes of determining eligibility to 

take the cost-of-goods-sold deduction. This conclusion 

would lead to the absurd result that a company that had 

no subsidiaries could take all costs-of-goods-sold 

deductions allowable under section 171.1012, but if that 

same company created subsidiaries it could potentially 

lose substantial cost-of-goods-sold deductions because 

each subsidiary might not sell goods in the ordinary 

course of its business. 

Newpark, 422 S.W.3d at 52 (internal citations omitted) (emphasis added). 

Finally, the Comptroller’s position that the includable costs are limited 

to only those associated with particular business activities is belied by his 

recent public pronouncement that businesses incurring research costs may 

deduct them as COGS even if the taxpayer doesn’t produce any of the goods 

it sells. See Texas Comptroller of Public Accounts, Letter Ruling

201504069L (April 23, 2015) (STAR document available at 

http://aixtcp.cpa.state.tx.us/opendocs/open32/201504069l.html).
68

V. NO DEFERENCE IS OWED TO THE COMPTROLLER’S POSITIONS. 

As a default argument throughout his brief, the Comptroller contends 

that this Court must defer to his positions either because the Comptroller is 

charged with enforcement of the tax code or because the COGS deduction is 

an “exemption” rather than an “exclusion.” Both arguments lack merit.

“[A] precondition to deference to an agency’s interpretation of a statute 

is ambiguity.” Am. Multi-Cinema, Inc. v. Hegar, No. 03-14-00397-CV, --

S.W.3d --, 2015 WL 1967877, *3-4 (Tex. App.—Austin Apr. 30, 2015, no. pet. 

h.) (citing Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632, 

635 (Tex. 2013) (describing agency-deference doctrine)). Section 171.1012 is 

not ambiguous, so no deference is owed to the Comptroller’s positions. 

Newpark, 422 S.W.3d at 56 n.9. 

In any event, such deference is not required where the agency’s 

interpretation “is plainly erroneous or inconsistent” with the controlling 

statute. Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632, 635 

& n.10 (Tex. 2013); USA Waste Servs., Inc. v. Strayhorn, 150 S.W.3d 491, 

494 (Tex. App.—Austin 2004, pet. denied). Consequently, this Court need 

not defer to the Comptroller’s flawed interpretations of Section 171.1012. 

Finally, the Comptroller incorrectly asserts that this Court should 

interpret the COGS deduction as an exemption from tax and, on that basis 
69

hold CGG to stricter rules of construction and a higher burden of proof. The 

COGS deduction is not an exemption. It is a method used to arrive at 

“margin,” the tax base adopted by the legislature, which is akin to an 

“exclusion.” “Exemptions,” on the other hand, make special reductions to 

that base after it is calculated (allowing a taxpayer to avoid paying the tax 

completely). These are specifically identified and treated separately in the 

code. See Tex. Tax Code §§ 171.051-.088. Because the same concerns of 

equality and uniformity do not arise with exclusions and deductions as they 

do with exemptions, the stricter rules applicable to exemptions should not be 

imposed on taxpayers claiming exclusions or deductions. Instead, this Court 

should construe the COGS deduction strictly against the Comptroller and 

liberally in favor of CGG, and require CGG to prove its entitlement by a 

preponderance of the evidence. See Am. Multi-Cinema, 2015 WL 1967877, 

at *3; Roark Amusement & Vending, L.P. v. Combs, 2011 WL 255535 (Tex. 

App.—Austin Jan. 26, 2011), aff’d by 422 S.W.3d 632 (Tex. 2013). 

In urging otherwise, the Comptroller relies on an overly-broad 

interpretation of Upjohn Co. v. Rylander, 38 S.W.3d 600, 606 (Tex. App.—

Austin 2000, pet. denied). Upjohn involved the former “earned surplus tax,” 

which is fundamentally different than the current “margin tax.” The 

taxpayer in Upjohn sought a special deduction, imposed after the calculation 
70

of the tax base, which would have allowed it to avoid tax for food and health 

care supplies. Id. at 605. This was properly treated as an exemption. To the 

contrary, the COGS deduction, as a component of the tax-base calculation for 

all taxpayers, should be treated as an “exclusion.”

PRAYER 

Based on the foregoing, Appellee CGG Veritas Services (U.S.), Inc. 

respectfully prays that this Court overrule each of the Comptroller’s issues 

and affirm the judgment in full.16 CGG further prays that this Court tax all 

costs against Appellees, in this Court and the court below, and award CGG 

any such other relief at law or equity to which it may be justly entitled. Tex. 

R. App. P. 43.4; Tex. R. Civ. P. 139. 

 

16 There is no legitimate basis to remand this case to allow the Comptroller a new 

opportunity to attempt to parse the costs properly included in CGG’s COGS calculation. 

However, should a remand be ordered, CGG preserves its rights to present argument 

and evidence in support of its calculation. 
71

Respectfully submitted, 

MARTENS, TODD, LEONARD, TAYLOR & AHLRICH

301 Congress Ave., Suite 1950 

Austin, Texas 78701 

Telephone: (512) 542-9898 

Telecopier: (512) 542-9899 

By: /s/ Amanda G. Taylor 

Amanda Taylor 

ataylor@textaxlaw.com

State Bar No. 24045921 

James F. Martens 

jmartens@textaxlaw.com 

State Bar No. 13050720 

Lacy L. Leonard 

lleonard@textaxlaw.com 

State Bar No. 24040561 

Danielle V. Ahlrich 

dahlrich@textaxlaw.com 

State Bar No. 24059215 

ATTORNEYS FOR APPELLEE 

CGG VERITAS SERVICES (U.S.), INC. 

CERTIFICATE OF COMPLIANCE 

I hereby certify that this Appellee’s Brief complies with the typeface 

requirements of Tex. R. App. P. 9.4(e) because it has been prepared in a 

conventional typeface no smaller than 14-point for text and 12-point for 

footnotes. This document also complies with the word-count limitations of 

Tex. R. App. P. 9.4(i) because it contains 14,696 words, excluding any parts 

exempted by Tex. R. App. P. 9.4(i)(1). 

 /s/ Amanda G. Taylor 

 Amanda Taylor 
72

CERTIFICATE OF SERVICE 

Pursuant to the Texas Rules of Appellate Procedure, a true and correct 

copy of the foregoing was served via e-service on counsel listed below, on the 

20th day of July, 2015. Tex. R. App. P. 9.5. 

Joseph D. Hughes 

Assistant Solicitor General 

OFFICE OF THE ATTORNEY GENERAL P.O. 

Box 12548 (MC 059) 

Austin, Texas 78711-2548 

(512) 936-2923 

(512) 474-2697 [fax] 

jody.hughes@texasattorneygeneral.gov 

Charles Eldred 

Assistant Attorney General 

OFFICE OF THE ATTORNEY GENERAL, 

FINANCIAL AND TAX LITIGATION DIVISION

P.O. Box 12548 

Austin, Texas 78711 

(512) 463-1745 

(512) 477-2348 [fax] 

charles.eldred@texasattorneygeneral.gov

 /s/ Amanda G. Taylor

 Amanda Taylor 
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§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012

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(a) In this section:

(1) “Goods” means real or tangible personal property sold in the ordinary course of business of a taxable entity.

(2) “Production” includes construction, installation, manufacture, development, mining, extraction, improvement, creation,

raising, or growth.

(3)(A) “Tangible personal property” means:

(i) personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any

other manner;

(ii) films, sound recordings, videotapes, live and prerecorded television and radio programs, books, and other similar

property embodying words, ideas, concepts, images, or sound, without regard to the means or methods of distribution or

the medium in which the property is embodied, for which, as costs are incurred in producing the property, it is intended

or is reasonably likely that any medium in which the property is embodied will be mass-distributed by the creator or

any one or more third parties in a form that is not substantially altered; and

(iii) a computer program, as defined by Section 151.0031.

(B) “Tangible personal property” does not include:

(i) intangible property; or

(ii) services.
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 2

(b) Subject to Section 171.1014, a taxable entity that elects to subtract cost of goods sold for the purpose of computing its

taxable margin shall determine the amount of that cost of goods sold as provided by this section.

(c) The cost of goods sold includes all direct costs of acquiring or producing the goods, including:

(1) labor costs;

(2) cost of materials that are an integral part of specific property produced;

(3) cost of materials that are consumed in the ordinary course of performing production activities;

(4) handling costs, including costs attributable to processing, assembling, repackaging, and inbound transportation costs;

(5) storage costs, including the costs of carrying, storing, or warehousing property, subject to Subsection (e);

(6) depreciation, depletion, and amortization, reported on the federal income tax return on which the report under this chapter

is based, to the extent associated with and necessary for the production of goods, including recovery described by Section

197, Internal Revenue Code;

(7) the cost of renting or leasing equipment, facilities, or real property directly used for the production of the goods, including

pollution control equipment and intangible drilling and dry hole costs;

(8) the cost of repairing and maintaining equipment, facilities, or real property directly used for the production of the goods,

including pollution control devices;

(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;

(10) geological and geophysical costs incurred to identify and locate property that has the potential to produce minerals;

(11) taxes paid in relation to acquiring or producing any material, or taxes paid in relation to services that are a direct cost

of production;

(12) the cost of producing or acquiring electricity sold; and

(13) a contribution to a partnership in which the taxable entity owns an interest that is used to fund activities, the costs of

which would otherwise be treated as cost of goods sold of the partnership, but only to the extent that those costs are related to

goods distributed to the taxable entity as goods-in-kind in the ordinary course of production activities rather than being sold.
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 3

(d) In addition to the amounts includable under Subsection (c), the cost of goods sold includes the following costs in relation

to the taxable entity's goods:

(1) deterioration of the goods;

(2) obsolescence of the goods;

(3) spoilage and abandonment, including the costs of rework labor, reclamation, and scrap;

(4) if the property is held for future production, preproduction direct costs allocable to the property, including costs of

purchasing the goods and of storage and handling the goods, as provided by Subsections (c)(4) and (c)(5);

(5) postproduction direct costs allocable to the property, including storage and handling costs, as provided by Subsections

(c)(4) and (c)(5);

(6) the cost of insurance on a plant or a facility, machinery, equipment, or materials directly used in the production of the

goods;

(7) the cost of insurance on the produced goods;

(8) the cost of utilities, including electricity, gas, and water, directly used in the production of the goods;

(9) the costs of quality control, including replacement of defective components pursuant to standard warranty policies,

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

(10) licensing or franchise costs, including fees incurred in securing the contractual right to use a trademark, corporate plan,

manufacturing procedure, special recipe, or other similar right directly associated with the goods produced.

(e) The cost of goods sold does not include the following costs in relation to the taxable entity's goods:

(1) the cost of renting or leasing equipment, facilities, or real property that is not used for the production of the goods;

(2) selling costs, including employee expenses related to sales;

(3) distribution costs, including outbound transportation costs;

(4) advertising costs;
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 4

(5) idle facility expense;

(6) rehandling costs;

(7) bidding costs, which are the costs incurred in the solicitation of contracts ultimately awarded to the taxable entity;

(8) unsuccessful bidding costs, which are the costs incurred in the solicitation of contracts not awarded to the taxable entity;

(9) interest, including interest on debt incurred or continued during the production period to finance the production of the

goods;

(10) income taxes, including local, state, federal, and foreign income taxes, and franchise taxes that are assessed on the

taxable entity based on income;

(11) strike expenses, including costs associated with hiring employees to replace striking personnel, but not including the

wages of the replacement personnel, costs of security, and legal fees associated with settling strikes;

(12) officers' compensation;

(13) costs of operation of a facility that is:

(A) located on property owned or leased by the federal government; and

(B) managed or operated primarily to house members of the armed forces of the United States; and

(14) any compensation paid to an undocumented worker used for the production of goods. As used in this subdivision:

(A) “undocumented worker” means a person who is not lawfully entitled to be present and employed in the United States;

and

(B) “goods” includes the husbandry of animals, the growing and harvesting of crops, and the severance of timber from

realty.

(f) A taxable entity may subtract as a cost of goods sold indirect or administrative overhead costs, including all mixed service

costs, such as security services, legal services, data processing services, accounting services, personnel operations, and general

financial planning and financial management costs, that it can demonstrate are allocable to the acquisition or production of

goods, except that the amount subtracted may not exceed four percent of the taxable entity's total indirect or administrative
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 5

overhead costs, including all mixed service costs. Any costs excluded under Subsection (e) may not be subtracted under this

subsection.

(g) A taxable entity that is allowed a subtraction by this section for a cost of goods sold and that is subject to Section 263A,

460, or 471, Internal Revenue Code, may capitalize that cost in the same manner and to the same extent that the taxable entity

capitalized that cost on its federal income tax return or may expense those costs, except for costs excluded under Subsection

(e), or in accordance with Subsections (c), (d), and (f). If the taxable entity elects to capitalize costs, it must capitalize each cost

allowed under this section that it capitalized on its federal income tax return. If the taxable entity later elects to begin expensing

a cost that may be allowed under this section as a cost of goods sold, the entity may not deduct any cost in ending inventory

from a previous report. If the taxable entity elects to expense a cost of goods sold that may be allowed under this section, a

cost incurred before the first day of the period on which the report is based may not be subtracted as a cost of goods sold. If

the taxable entity elects to expense a cost of goods sold and later elects to capitalize that cost of goods sold, a cost expensed

on a previous report may not be capitalized.

(h) A taxable entity shall determine its cost of goods sold, except as otherwise provided by this section, in accordance with the

methods used on the federal income tax return on which the report under this chapter is based. This subsection does not affect

the type or category of cost of goods sold that may be subtracted under this section.

(i) A taxable entity may make a subtraction under this section in relation to the cost of goods sold only if that entity owns the

goods. The determination of whether a taxable entity is an owner is based on all of the facts and circumstances, including the

various benefits and burdens of ownership vested with the taxable entity. A taxable entity furnishing labor or materials to a

project for the construction, improvement, remodeling, repair, or industrial maintenance (as the term “maintenance” is defined

in 34 T.A.C. Section 3.357) of real property is considered to be an owner of that labor or materials and may include the costs,

as allowed by this section, in the computation of cost of goods sold. Solely for purposes of this section, a taxable entity shall

be treated as the owner of goods being manufactured or produced by the entity under a contract with the federal government,

including any subcontracts that support a contract with the federal government, notwithstanding that the Federal Acquisition

Regulation may require that title or risk of loss with respect to those goods be transferred to the federal government before the

manufacture or production of those goods is complete.

(j) A taxable entity may not make a subtraction under this section for cost of goods sold to the extent the cost of goods sold

was funded by partner contributions and deducted under Subsection (c)(13).

(k) Notwithstanding any other provision of this section, if the taxable entity is a lending institution that offers loans to the public

and elects to subtract cost of goods sold, the entity, other than an entity primarily engaged in an activity described by category

5932 of the 1987 Standard Industrial Classification Manual published by the federal Office of Management and Budget, may

subtract as a cost of goods sold an amount equal to interest expense. For purposes of this subsection, an entity engaged in

lending to unrelated parties solely for agricultural production offers loans to the public.

(k-1) Notwithstanding any other provision of this section, the following taxable entities may subtract as a cost of goods sold

the costs otherwise allowed by this section in relation to tangible personal property that the entity rents or leases in the ordinary

course of business of the entity:

(1) a motor vehicle rental or leasing company that remits a tax on gross receipts imposed under Section 152.026;
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 6

(2) a heavy construction equipment rental or leasing company; and

(3) a railcar rolling stock rental or leasing company.

(k-2) This subsection applies only to a pipeline entity: (1) that owns or leases and operates the pipeline by which the product

is transported for others and only to that portion of the product to which the entity does not own title; and (2) that is

primarily engaged in gathering, storing, transporting, or processing crude oil, including finished petroleum products, natural

gas, condensate, and natural gas liquids, except for a refinery installation that manufactures finished petroleum products from

crude oil. Notwithstanding Subsection (e)(3) or (i), a pipeline entity providing services for others related to the product that the

pipeline does not own and to which this subsection applies may subtract as a cost of goods sold its depreciation, operations,

and maintenance costs allowed by this section related to the services provided.

(k-3) For purposes of Subsection (k-2), “processing” means the physical or mechanical removal, separation, or treatment of

crude oil, including finished petroleum products, natural gas, condensate, and natural gas liquids after those materials are

produced from the earth. The term does not include the chemical or biological transformation of those materials.

(l) Notwithstanding any other provision of this section, a payment made by one member of an affiliated group to another member

of that affiliated group not included in the combined group may be subtracted as a cost of goods sold only if it is a transaction

made at arm's length.

(m) In this section, “arm's length” means the standard of conduct under which entities that are not related parties and that have

substantially equal bargaining power, each acting in its own interest, would negotiate or carry out a particular transaction.

(n) In this section, “related party” means a person, corporation, or other entity, including an entity that is treated as a passthrough or disregarded entity for purposes of federal taxation, whether the person, corporation, or entity is subject to the tax

under this chapter or not, in which one person, corporation, or entity, or set of related persons, corporations, or entities, directly

or indirectly owns or controls a controlling interest in another entity.

(o) If a taxable entity, including a taxable entity with respect to which cost of goods sold is determined pursuant to Section

171.1014(e)(1), whose principal business activity is film or television production or broadcasting or the distribution of tangible

personal property described by Subsection (a)(3)(A)(ii), or any combination of these activities, elects to subtract cost of goods

sold, the cost of goods sold for the taxable entity shall be the costs described in this section in relation to the property and

include depreciation, amortization, and other expenses directly related to the acquisition, production, or use of the property,

including expenses for the right to broadcast or use the property.

(p) to (s) [Blank].

(t) If a taxable entity that is a movie theater elects to subtract cost of goods sold, the cost of goods sold for the taxable entity shall

be the costs described by this section in relation to the acquisition, production, exhibition, or use of a film or motion picture,

including expenses for the right to use the film or motion picture.
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 7

Credits

Added by Acts 2006, 79th Leg., 3rd C.S., ch. 1, § 5, eff. Jan. 1, 2008. Amended by Acts 2007, 80th Leg., ch. 1282, §§ 14,

15, eff. Jan. 1, 2008; Acts 2013, 83rd Leg., ch. 1232 (H.B. 500), § 9, eff. Jan. 1, 2014; Acts 2013, 83rd Leg., ch. 1232 (H.B.

500), § 10(a), eff. Sept. 1, 2013.

Notes of Decisions (1)

V. T. C. A., Tax Code § 171.1012, TX TAX § 171.1012

Current through Chapters effective immediately through Chapter 46 of the 2015 Regular Session of the 84th Legislature

End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 8

Editor's and Revisor's Notes (8)

HISTORICAL AND STATUTORY NOTES

2015 Main Volume

Acts 2007, 80th Leg., ch. 1282 in subsec. (a)(3)(A)(ii) inserted “live and prerecorded television and radio

programs” following “videotapes,”, substituted “, without regard to the means or methods of distribution or the

medium in which the property is embodied,” for “by the creator of the property” following “or sound”, and deleted

“tangible” preceding “medium in which the property is embodied”; in subsec. (c)(6) inserted “reported on the

federal income tax return on which the report under this chapter is based,”; rewrote subsec. (g); in subsec. (h)

substituted “used on the federal income tax return on which the report under this chapter is based” for “permitted

by federal statutes and regulations”; rewrote subsec. (k); and added subsec. (o). Prior thereto subsecs. (g) and

(k) read:

“(g) A taxable entity that is allowed a subtraction by this section for a cost of goods sold and that is subject to 

Section 263A , 460 , or 471, Internal Revenue Code , shall capitalize that cost in the same manner and to the

same extent that the taxable entity is required or allowed to capitalize the cost under federal law and regulations,

except for costs excluded under Subsection (e), or in accordance with Subsections (c), (d), and (f). ”

“(k) Notwithstanding any other provision of this section, if the taxable entity is a lending institution that offers loans

to the public and elects to subtract cost of goods sold, the entity may subtract as a cost of goods sold an amount

equal to interest expense.”

Acts 2013, 83rd Leg., ch. 1232 (H.B. 500) added subsecs. (k-2), (k-3), and (t).

Section 10(b) of Acts 2013, 83rd Leg., ch. 1232 (H.B. 500) provides:

“ Section 171.1012(t), Tax Code , as added by this section, is a clarification of existing law and does not imply that

existing law may be construed as inconsistent with the law as amended by this section.”

Section 19 of Acts 2013, 83rd Leg., ch. 1232 (H.B. 500) provides:

“This Act applies only to a report originally due on or after the effective date [Sept. 1, 2013] of this Act.”
§ 171.103. Determination of Gross Receipts from Business Done..., TX TAX § 171.103

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 1

	

		


		


		

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(a) Subject to Section 171.1055, in apportioning margin, the gross receipts of a taxable entity from its business done in this

state is the sum of the taxable entity's receipts from:

(1) each sale of tangible personal property if the property is delivered or shipped to a buyer in this state regardless of the

FOB point or another condition of the sale;

(2) each service performed in this state, except that receipts derived from servicing loans secured by real property are in this

state if the real property is located in this state;

(3) each rental of property situated in this state;

(4) the use of a patent, copyright, trademark, franchise, or license in this state;

(5) each sale of real property located in this state, including royalties from oil, gas, or other mineral interests; and

(6) other business done in this state.

(b) A combined group shall include in its gross receipts computed under Subsection (a) the gross receipts of each taxable entity

that is a member of the combined group and that has a nexus with this state for the purpose of taxation.

(c) Repealed by Acts 2013, 83rd Leg., ch. 1232 (H.B. 500), § 15.

(d) Repealed by Acts 2013, 83rd Leg., ch. 1232 (H.B. 500), § 15.

Credits

Acts 1981, 67th Leg., p. 1697, ch. 389, § 1, eff. Jan. 1, 1982. Amended by Acts 1984, 68th Leg., 2nd C.S., ch. 31, art. 15, §

1, eff. Oct. 2, 1984; Acts 1991, 72nd Leg., 1st C.S., ch. 5, § 8.06, eff. Jan. 1, 1992; Acts 1997, 75th Leg., ch. 1185, § 5, eff.
§ 171.103. Determination of Gross Receipts from Business Done..., TX TAX § 171.103

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 2

Jan. 1, 1998; Amended and consolidated this section with V.T.C.A., Tax Code § 171.1032 by Acts 2006, 79th Leg., 3rd C.S.,

ch. 1, § 5, eff. Jan. 1, 2008; Acts 2007, 80th Leg., ch. 1282, § 20, eff. Jan. 1, 2008; Acts 2013, 83rd Leg., ch. 1232 (H.B. 500),

§ 15, eff. Jan. 1, 2014.

Notes of Decisions (49)

V. T. C. A., Tax Code § 171.103, TX TAX § 171.103

Current through Chapters effective immediately through Chapter 46 of the 2015 Regular Session of the 84th Legislature

End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
§ 171.103. Determination of Gross Receipts from Business Done in..., TX TAX § 171.103

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 3

Editor's and Revisor's Notes (36)

HISTORICAL AND STATUTORY NOTES

2015 Main Volume

Acts 2006, 79th Leg., 3rd C.S., ch. 1 rewrote this section, which prior thereto read:

“§ 171.103. Determination of Gross Receipts From Business Done in This State for Taxable Capital

“In apportioning taxable capital, the gross receipts of a corporation from its business done in this state is the sum

of the corporation's receipts from:

“(1) each sale of tangible personal property if the property is delivered or shipped to a buyer in this state

regardless of the FOB point or another condition of the sale, and each sale of tangible personal property shipped

from this state to a purchaser in another state in which the seller is not subject to taxation;

“(2) each service performed in this state;

“(3) each rental of property situated in this state;

“(4) the use of a patent, copyright, trademark, franchise, or license in this state;

“(5) each sale of real property located in this state, including royalties from oil, gas, or other mineral interests; and

“(6) other business done in this state.”

Acts 2007, 80th Leg., ch. 1282 added subsecs. (c) and (d).

Section 38 of Acts 2007, 80th Leg., ch. 1282 provides:

“This Act applies only to a report originally due on or after the effective date [Jan. 1, 2008] of this Act.

“The legislature intends that each change in law made to the following sections of the Tax Code by this Act be

considered as a clarification of existing law and not imply that the existing law may be construed as inconsistent

with the law as amended by this Act:

“(2) 171.103(5);”

Acts 2013, 83rd Leg., ch. 1232 (H.B. 500), repealed subsecs. (c) and (d), which prior thereto read:

“(c) A taxable entity that is a combined group shall include in a report filed under Section 171.201 or 171.202, for

each member of the combined group that does not have nexus with this state for the purpose of taxation:

“(1) the gross receipts computed under Subsection (a); and

“(2) the gross receipts computed under Subsection (a) that are subject to taxation in another state under a

throwback law or regulation.

“(d) The information required by Subsection (c) may be used for informational purposes only. The comptroller

shall adopt rules as necessary to enforce the reporting requirement prescribed by Subsection (c). ”

Section 19 of Acts 2013, 83rd Leg., ch. 1232 (H.B. 500) provides:

“This Act applies only to a report originally due on or after the effective date of this Act [Jan. 1, 2014]. ”

Prior Laws:
§ 171.103. Determination of Gross Receipts from Business Done in..., TX TAX § 171.103

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 4

Acts 1907, 30th Leg., 1st C.S., p. 503.

Rev.Civ.St.1911, art. 7393.

Acts 1919, 36th Leg., p. 100.

Acts 1930, 41st Leg., 5th C.S., p. 220, ch. 68, § 2.

Acts 1931, 42nd Leg., p. 441, ch. 265, § 1.

Acts 1941, 47th Leg., p. 269, ch. 184, art. 8, § 1.

Acts 1949, 51st Leg., p. 975, ch. 536, § 1.

Acts 1951, 52nd Leg., p. 695, ch. 402, § 9.

Acts 1954, 53rd Leg., 1st C.S., p. 3, ch. 2, art. 3, § 1.

Acts 1955, 54th Leg., p. 1080, ch. 404, art. 4, § 1.

Acts 1957, 55th Leg., p. 1179, ch. 394, § 1.

Vernon's Ann.Civ.St. art. 7084 .

Acts 1959, 56th Leg., 3rd C.S., p. 187, ch. 1.

Acts 1969, 61st Leg., 2nd C.S., ch. 1, art. 7, § 1.

V.A.T.S. Tax.-Gen. art. 12.02, § (1)(b).
§ 151.009. “Tangible Personal Property”, TX TAX § 151.009

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 1

	

		


		


		

 
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“Tangible personal property” means personal property that can be seen, weighed, measured, felt, or touched or that is perceptible

to the senses in any other manner, and, for the purposes of this chapter, the term includes a computer program and a telephone

prepaid calling card.

Credits

Acts 1981, 67th Leg., p. 1547, ch. 389, § 1, eff. Jan. 1, 1982. Amended by Acts 1984, 68th Leg., 2nd C.S., ch. 31, art. 6, § 2, eff.

Oct. 2, 1984; Acts 1987, 70th Leg., 2nd C.S., ch. 5, art. 1, pt. 4, § 11; Acts 1997, 75th Leg., ch. 1040, § 16, eff. Sept. 1, 1997.

Notes of Decisions (9)

V. T. C. A., Tax Code § 151.009, TX TAX § 151.009

Current through Chapters effective immediately through Chapter 46 of the 2015 Regular Session of the 84th Legislature

End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
§ 151.009. “Tangible Personal Property”, TX TAX § 151.009

 © 2015 Thomson Reuters. No claim to original U.S. Government Works. 2

Editor's and Revisor's Notes (6)

HISTORICAL AND STATUTORY NOTES

2015 Main Volume

Prior Laws:

Acts 1941, 47th Leg., p. 269, ch. 184, art. 10, § 1.

Acts 1950, 51st Leg., 1st C.S., p. 10, ch. 2, art. 10, § 1.

Vernon's Ann.Civ.St. arts. 7047l, §§ 1, 1a, 1 1/2 ; 7047 l -1, § 1.

Acts 1959, 56th Leg., 3rd C.S., p. 187, ch. 1, arts. 20.01 to 20.20.

Acts 1961, 57th Leg., 1st C.S., p. 71, ch. 24, art. 1, § 1.

V.A.T.S. Tax.-Gen. art. 20.01, § (P).
250
251
265
266
267
268
269
270





Texas Comptroller of Public Accounts STAR System

201406920L

DATE: June 10, 2014

TO: Denise Stewart, Audit Division

Robin Robinson, General Counsel

FROM: Teresa Bostick, Tax Policy Division

SUBJECT: Policy change based on TITAN and NEWPARK 

ISSUE

Based on the courts’ language and analysis in TITAN and NEWPARK, we are 

revising the policy with regard to subcontracting payments eligible for 

exclusion under Section 171.1011(g)(3) and qualifying activities for the COGS 

deduction under Section 171.1012(i).

BACKGROUND 

The court in TITAN found that Titan Transportation, L.P. (Titan), which is in 

the business of hauling, delivering, and depositing aggregate at real property 

construction sites, was entitled to exclude from revenue, pursuant to Section 

171.1011(g)(3), payments the taxpayer made to its subcontractors providing this 

service for its customers.

Newpark Resources, Inc. (Newpark), an oil field service business, was the 

reporting entity for a combined group which included its subsidiary, Newpark 

Environmental Services, L.L.C. (NES). The court in NEWPARK found that Newpark 

was entitled to take a COGS deduction under Section 171.1012(i) for NES’s 

activities of removal and disposal of waste materials from oil and gas well 

drilling sites. 

REVISED POLICY

This change has immediate effect and a taxable entity may file an amended 

franchise tax report for years that are open within the statute of limitations. 

Section 171.1011(g)(3) states, “A taxable entity shall exclude from its total 

revenue...only the following flow-through funds that are mandated by contract to 

be distributed to other entities: subcontracting payments handled by the 

taxable entity to provide services, labor, or materials in connection with the 

actual or proposed design, construction, remodeling, or repair of improvements 

on real property or the location of the boundaries of real property.”

Under the revised policy, subcontracting payments which qualify as flow-through 

funds under Section 171.1011(g) because they are mandated by contract to be 

distributed to other entities, and have a reasonable nexus to the actual or 

proposed design, construction, remodeling, or repair of improvements on real 

property or the location of boundaries of real property, may be excluded from 

revenue pursuant to Section 171.1011(g)(3). A payment is mandated by contract 

to be distributed to other entities if the taxable entity has a contract with 

/>7D[7\SH)UDQFKLVH@>'RFXPHQW7\SH/HWWHU0HPR@ KWWSDL[WFSFSDVWDWHW[XVRSHQGRFVRSHQOKWPO

RI 30
its customers providing that subcontractors may be used and payment to the 

subcontractors, if used, must be made from the funds paid to the taxable 

entity. Please keep in mind that TITAN is being appealed on the basis that 

there was no contract in effect involving flow-through funds because the funds 

at issue were not mandated by contract to be distributed to other entities. 

Instead, the contract at issue was an ordinary contract between two parties for 

the provision of services in the regular course of business, as described in 

Section 171.1011(i).

With regard to the COGS deduction, Section 171.1012(i) states, “A taxable 

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

improvement, remodeling, repair, or industrial maintenance of real property is 

considered to be an owner of that labor or materials and may include the costs, 

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

Under the revised policy, we are expanding the interpretation of what is 

considered to be furnishing labor or materials to a project for the 

construction, improvement, remodeling, repair, or industrial maintenance of 

real property and will no longer require an entity to actually physically touch 

the property or make a change to the property to qualify for the COGS 

deduction, regardless of whether the entity is furnishing the labor or 

materials to a member of the entity’s combined group or if the entity is a 

single entity filer.

The policy changes are similar for both Sections 171.1011(g)(3) and 

171.1012(i), but there are slight differences in how the policy will apply to 

the respective sections. For instance, the policy for both Sections will 

permit industries such as transportation companies delivering aggregate and 

other similar materials to a construction site, waste removal companies, 

demolition companies, and inspectors, among others, to claim either an 

exclusion from revenue – provided the transaction meets the contractual 

requirement of flow-through funds – or a COGS deduction. Although not new, one 

slight difference between the Sections is that Section 171.1011(g)(3) uses the 

term “proposed” – absent from Section 171.1012(i) – which may permit costs for 

activities performed by architects and engineers to qualify as exclusions from 

revenue, without regard to whether construction occurs.

Costs considered too far removed from the construction, improvement, 

remodeling, repair, or industrial maintenance of real property do not qualify 

for either an exclusion from revenue or a COGS deduction. Entities providing 

services that are defined as “service costs” under Rule 3.588(b)(9) are too far 

removed and do not qualify for either an exclusion from revenue or a COGS 

deduction. Examples of these costs include legal services and accounting 

services.

Further, the revised policy does not change the treatment of taxable entities 

renting or leasing equipment to others for use in or during such projects. 

Section 171.1012(k-1) still limits the COGS deduction to taxpayers renting or 

leasing certain items to others. Taxpayers who rent or lease equipment other 

than heavy construction equipment, such as fencing or port-a-potties, to others 

for use in projects for the construction, improvement, remodeling, repair or 

industrial maintenance of real property, are not eligible for the COGS 

deduction under Section 171.1012.

201406920L [Tax Type: Franchise] [Document Type: Letter/Memo] http://aixtcp.cpa.state.tx.us/opendocs/open32/201406920l.html

2 of 3 7/20/2015 3:36 PM
ACCESSION NUMBER: 201406920L

SUPERSEDED: N

DOCUMENT TYPE: L

DATE: 06/18/2014

TAX TYPE: Franchise

201406920L [Tax Type: Franchise] [Document Type: Letter/Memo] http://aixtcp.cpa.state.tx.us/opendocs/open32/201406920l.html

3 of 3 7/20/2015 3:36 PM
Texas Comptroller of Public Accounts STAR System

201504069L

Date: April 23, 2015

To: Denise Stewart, Director, Audit Division

From: Teresa Bostick, Director, Tax Policy Division

Subject: Tax Code Section 171.1012(c)(9) - Cost of Goods Sold for 

Research, Experimental, Engineering, and Design Activities

Issue

Whether a taxable entity that is not the producer of goods it sells, because it 

contracts out the manufacturing of the product, can include in costs of goods 

sold (COGS) expenses for research, experimental, engineering, and design 

activities related to those products.

Relevant Authorities

Texas Tax Code Section171.1012(c)(9) Internal Revenue Code Section 174 Treas. 

Regs. Section1.174-1 through 1.174-4

Discussion

Tax Code Section171.1012(c)(9) states, “the cost of goods sold includes all 

direct costs of acquiring or producing 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 (IRC).”

Under prior policy COGS deductions for a taxable entity that was not the 

producer of the goods were limited to acquisition, storage, handling, and other 

costs specified in Tax Code Section171.1012(c) and (d) not related to 

production. Costs directly related to the production of goods that were 

typically allowed to a producer, such as research, experimental, engineering, 

and design activity costs, were not allowed as a COGS deduction for a taxable 

entity that was not the producer of the goods.

Upon further review, Tax Policy determined that a taxable entity who is 

eligible for COGS may claim as COGS all research and experimental costs 

described by Section 174 of the IRC, regardless of whether the taxable entity 

is considered the producer of the goods.

Section 174 of the IRC does not define research and experimental costs; 

however, related Treas. Reg. Section1.174-2 does provide a definition of 

research and experimental expenditures. Treas. Reg. Section1.174-2(a)(1) 

states, “The term research or experimental expenditures, as used in section 

201504069L [Tax Type: Franchise] [Document Type: Letter/Memo] http://aixtcp.cpa.state.tx.us/opendocs/open32/201504069l.html

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174, means expenditures incurred in connection with the taxpayer’s trade or 

business which represent research and development costs in the experimental or 

laboratory sense.” Treas. Reg. Sections1.174-2(a)(1)-(2) also describe what 

costs are generally included in the term research and experimental expenditures

and “...includes all such costs incident to the development or improvement of a 

product.”

Based on these authorities, regardless of whether the taxable entity is the 

producer of the good or not, the taxable entity may include in its COGS 

deduction research, experimental, engineering, and design activity costs, 

including all research or experimental expenditures described by Section 174 of 

the IRC relating to goods it sells.

This policy is effective for all open periods within the statute of limitations 

and future periods.

ACCESSION NUMBER: 201504069L

SUPERSEDED: N

DOCUMENT TYPE: L

DATE: 04/24/2015

TAX TYPE: Franchise

201504069L [Tax Type: Franchise] [Document Type: Letter/Memo] http://aixtcp.cpa.state.tx.us/opendocs/open32/201504069l.html

2 of 2 7/20/2015 3:37 PM
MerriamWebster's

Collegiate'

Dictionary

Er-EVENTH

EoITIoN

Merriam-'Webster, Incorporated

Springfield, Massachusetts, U.S.A.

1 . 10 provide wl1h n mnl or 1nn1-

tl g vi ( 1549) . (dirt nml fillh 11w11etl hor hnlr) 

·-" tfl•I• n cn cddlll~ mass,...,, vi: 10 become mn11ud 1114 ,...•,11, 1n11• • rorrn" • 6()~) 1 a/.>'O matte '" matt : ro t · n ..i_~. ~o ll n9 < 1

11; 2 : 10 provide ( a pic1u rc) wilh ' ..,.,.1.,... r color)"'" .,, sJllSS· 0 

' . cd surface. fr, mat, ndj. - more at .,., , ti ~to" u11(10li~und 11 picture between picture nnd Juli j;O.-Jcr going 

j-1,I A thC ftllnlC 

.., .. .,,, ri.1:1. 2• Ir marar 10 kHI) (1681) : a bulln11111cr ill "\. 11br\ n IS~ wl;o kllls the bull In a bullOglu I ... '£11>~1 role a.n, (r OEgcm:ecca mhle, cqunl: akin 10 oe 1•·'\M6 ml1C' Id, KP.) {b~f l.2e) 1 a : n pen.on nr thin& h\~ _ n1ore •I M~ 0;

10 nb ~ to c;ope with nnother c : nn 

jj., 111 ~·"! t1cr lrbsuitnbly nssoclntcd <carpet nnd inlM " r-11 2 • 11 pn 1 "«" t wu or more pnrtles <• goll -> (r1 " 11 • ""~ cst bo b . a cun1es1 (11~ In en ~ or volleybull) 

- ~II ,ho111!1 ~ "'"',.~or side wins 11 ~P•~ l'lcd 1\11111bcr ur sctN or -l1tlit11 llllC p UY"'1on b: n ro~ ect vc partner In mnrrioi~ u. J 111orrlllB0<1~~o nior cees~lull y ns nn oJJtngonJst b I) ~1 111 : 11

> >OSillon (2) : \o provide with a won 1y ' .. 1111Jl'lllll0•1

1 ~,f~•rl<nn 2 : 10 join or give In marrinsc 3 c: to ~c: ~sse..sl s 'equni or harmonizing nttribu1cs (2) rut In" 'IC \c1. srni• (--<td progrnms to l<K.'lll nee~) b ( I) "'('(irl'l')~~ 0'r: nlw : to comp!l.n! favombly wllh (2) : to "'un1crp j:idcel .....-1 1he pants) c : to provide with " .. 1~: ~~~rovldc funds comp ~mcntary !O (employers may ri colllrlbulion - 0 . J. Miller) 4 . 10 Ot together or ·~>{.:;. nuina 1<>11c1hcr 5 a : to Olp or toss (colM) and com- ;.,.{rotu b : to 1os~ coins with - »f: to be a countct'llart - \'m3-cha-b.>I\ 1ttf/ - m atc h·e r " IMll rnllCt'li~. m<'<'t ll~ cnncllewick. fr. AF '?'ec~e) (IS49) 1 : :• il rciiared \\lck or C<lrd fCJT111crly used m firing llrcam1s or ~ ~ 11 \horl slender plcO:c of 011.mmablc ruatcrllll (rus wood) uh~ combu>tlblc 1nlKt urc thnt bur:m into nnmc when 5llghtly 1hro ~h friction ens by being scrntchcd ngainSl tl rt'>ugll 'urfnce) 

boarll \'mnch· ,h6rd\ 11 (en. 

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~ ~ Hlf!l111llnrly cut bonrds k \·,bi'Jk\ II ( 1937) : II r folder co111nlnlng ruws o r matchbos d 

..... ~ht<. 

x hbftk'\ 11 (17861 : 11 box for matchc• ·llu \-l;a\ mV (c:n. 1$30) : having no equal : FB J..I!~~ (a ...... 

Ith< »•ll•Y) - motch·loss·IY atlv k \·,H\k\ n (ca. 1637) 1 : a muskel equipped with a k 2 : a slow-burning match lowered over a bole In the ol a mlbkot to Ignite the charge 

koer \·,mA·k•r\ n (1638) : one thnt arrnnges n match: esp "ho •rlcs lo bring two unn1orrkd individuals to(lclhcr In an at· JO f'OtnOte 11 marriage - m a lch·mak·f ng \·k lo\ 11 

I V ~ (1893): golf compctl1ion in which 1hc wh111cr Is the per· r•m Wlru1h1a tho srentcr number or holes - compare S'rllOKB 

1

1f:lnl '[ (1?21\: ti Sltunllon (ns in tCJmls) In which One pl flyer or )~~ t\,ie mn1ch by wlnnl1111 1he 11ex1 point: lllso : the point Itself i·til, ~ ach· Jk\ 11 (.179 1) ·1 : n slender f>iccc ~~fl · of wood n\to~~n 1

11ntuh I~ mode 2: somclhlng rese mbling n mn1ch31lck •Up \ trn,e., (QUI n carrot Into ~s> •\l/o ,, n ,<1959) : 'MATCH \'m~~ \-,1vud\11 (1786): ll pieces of wood : SPUNTeRg 

~ill vt mot•ed; mot.Ing [Ml3, fr. AF mater, fr. mat, n .• check-

"jl~)· !r· Ar11101(ln .r/Jt//J111<71)) (14c): CHBCKMATI! 2 ~ M • CHl!C'KMA1'R I ""'t r~rob, fr. MLO mtili ttkin to OE /l,l'mtrtta guest at one'• ta· 0) <ll - more IU MllATJ (14c) 1 a (I): ASSOCIATll, COMPAN· fiJlv A:/11 B1i1 : an a-slnnnl to a more sknted worker : HBU'BR b" 1: 1:ate1o10, a uuoy - oru:n used as a Lunlllar ronn of ad- t::fhuJc: MATCll, l'llER 2 : a deck officer on a merchant ship an~w lhe captain 3 : one of " pair: as a : cllher nrnmber or II{ IJ\I"' 1

C$.p. ~ nl(UTlcd couple b : either member or o brccdlna lb lllat n s c : chh~r o r two mn ch~d objects OJ n1 ·Od: mot·lng w (1509) 1 urcliaic: EQUAL, MATCH 2 : 10 ft a 1

0&cther : COU~Lil 3 o : to join 1oge1her a8 mares b : to l.\~nt~ ror - 1•/ 1 : In hecome maltd <aears that ,._, well) 2 

~,~r e \'111(1·/HI\ 11 CF & An1crSp: F """ ' fr. AmcrSp mute ~vcr:;uJor1 drink 1111 11, fr. Quechucu11111l v~s.~c ll ( 1758) 1 : 11 tcn- !e:i; t m 11k esp. In So. Amcric1i 2 : "So. Amedcan rub or d if:w t1R11m·/~11sf~ ) or the holly family whose e1 ve.~ !lml mo ~ lot \' lllnkln11 mnll\: also : these leaves nnd sboois (cQ ~~~-, 0, 1

111a·t:.-\ ,, er. rr. MP. rr. MD 111a11c11ou1, 11 1.. bctl1019 \ 7) llr/t : M l l.OR : a $le llla-t;i-'161, mn1-'l()1\ n [I'. Iii., sailor's wife, fr. rnatelot] (ca. r \' "made u:.u. or rish In n seasoned wini; sa uce ·~~il·tQr\ 11 [L - more at MOTHER] (ca. 1859) clllt;Jly Brit 

~"1flof,aa \.mA·l~r-fo-'mi·I~. ,ma·\ n [L, fr. mater+ /amilias, ,.~·or/um/flu hou<ehold - more at FJ\.'lcflJ..Y] (1756): a wom- rt.81 tad of a hou<chold , rrl. \m;i..•ur+~I\ ntQ rME mmt!J'id, fr. MF & LL; MF, fr. LL. ma· , d · mater/a matter - more m MATTER] (14c) 1 a (I) : relnt- trived from , or consisting qr maUer; esp : ~UYS CAJ.. (lhe ..._ 1;11 (2): DOJ>ILY <-needs) b (I): of or rolntlng 10mnt1cr1111hcr a· ;} (..._. Cl\u~e) (2): or or relating to the subject mottor or re11· ~t .,, : llMJ•111tCA1. <- knowledge) 2 : having n:nl lm1>0rtnncc nt 00n1c(111enccs (fuo1s ...., to die lnvc$1.lga Uon) 3 a : being o f I\ 

· r \\1•)1•ldly 11n1111·c b : rcl:11ln11 lo or concerned with physicRl ~ ari ~P Jtunl or Intellectual things ("'-' progress) - ma 0 te 0 rl· i>-IG\ adv - ma·te·rl•al•neaa 11 

mat • maths 765 

8Yll ATBRIAI.,, PllVSICAI., COl\l'Ollll/\J.., l'llRNOMRN/\L, SS:NStlJ Lll, OD· mcrrva menn of or bc ng tt> uo1unllty. MAT!lRIAL Implies' form11- llon out or tnnglble mnllcr: u,cd In cont rnsf with .vplrl111aJ or lclvlll it may connote tl1c mu ndano. crnss. or gn.,ping (mmerlol value$). PHYSICAi. applies to whBI Is perceived dlrcolly by lhc senses nod may <:-Ont.rast with nHmt11/, ~plrlt1wl. or lma11/11m·y (tht phy.i-lcal benents or exercise). CORPOlll!AI. Implies h11vinri 1ho t1tnglble qWllliJcs or n body such 3!C shape, size. or rcsblnn<lC to force (arti~-i.< have portrayed o.n- gcts as corpon!al beings). PllRNOMRNAL applies to wha1 Is known or perceived through the senses rnU1cr than by intuition or mllonal dc- duc..-i.ion (sclcnllsls conccn1ed with the pllttromenul world). Sl!NSlllLr• 

stresses the capllbility or readily or forcibly Impressing the :<ellSl'~ (the 

earth's rollltion i~ not ,fl'11slbll! to us). OllJllCTIVll may ~trc...,; mntcrlnl or Independent cxlstcncc a1»1n from I\ subJtct perccrving II (no ob}ee· tfre evidence or domage). syn sec lu ndtlltion R£J.l!VANT 2m a lerlal 11 (1556) 1 o ( I): the clement<, cons1ituents, or ~ubstn ccs or which something Is composed or cnn be mailc (2) : mnu or Umt h!L' qunlllles which give II lnclivldunllty Md [)y Whlcli fl mny be Clltegol'lwtl (sUok y "') (e1q,Josivc ""''') I> (I) : Ro cl ~ (ns d.'ltn) I hut 11111y be worked lllto 11 mo rQ rtnl&hed form <- ror n h1ogropf)y) (2) : so1\1c- thlng 11soo for or mmJc lhc object or s 1udy <- for the next sc111QSlc 1') 

(3) : 11 t>erformer's rcpcrl(llrc (!\ Ctlmcdln11's -> c: M/\'rl'llR 3b d : Cl.O'nt e : a pe ~-011 K> t11l1111l y s ui1cd 10 ~o e pursuit (vnr:slty -> 

(leadership -> 2 o : appnrt1IU$ 110CCSS.'lry for doing or making wmc• thing (writing -..v) b : MATlll(ll.ll, m a 0te-rl 0 a l·lsa Brit 1'(1/' of MA1'1lRtAt.17.8 m a ·ta·rl·al·ls m \m~ tlr-C.:.- U-~m\ n (1733) 1 a: a theory that phys- ical matler Is the only or fundamental reality and that all being n11d processes and phenomena can be e>Cplnlnlld as mnnlfestotloM or resuh> of maucr b : n doc1rlno: thnt the only or the hialtest Vlllucs or objec- tives Uc In ruatcrilll wcll-bclna ond in lhc (urthcrnnco: of ntJllcriul progress c : n doctdn" thnt economic or social change Is matc1iully 

cnu,;ed - compare IUSTORICAI. MATt!RlALISM 2 : 8 preoccup111ion with or stress u.p0n matcrlol rather 1hnn intellectual or :.plrllual thing~ 

- ma .te.rl·al·lat )·lls1\ n Qr atQ - maole·rl·el·IB•tlc \· llr-i!-~· lls- lk\ 

at(/- ma 0 te 0 rl 0 a l0 S·tl·cal·IY \·tl·k(;>·)le\ ad• ma 0 le 0 rl 0 a l·l·tY \m~· llr-6· n· ~-t~\ 1>, pf-ties (LS70l 1 : the quali ty or sta le or ~l n1:1 m:ucdnl 2: somethlny thut I& material ma 0 te·ri·Bl·l·zo0 tlon \m .,1 lr-e-;1· ~· z.i-s 11\ 11 (1 843) 1 : Ille ncllon o r m:ucrinlizlng or beoomln11 111111erlnli1.cd 2 : something that hns been mnu::l'lnllzed; CS/> : AJ>l'AJU'rlON 

ma•IO•rl·ol·ize \m:.-' Ur-e-a-,lii\ vh · b:od; · l:r:-lng vt (17HI) 1 a : to mnk'c nmlcrlnl : OllrllCTl l'V b : to cau>0 to appear in bodily form <-

me spirits or lbc dead) 2 : to cause to be rnaicrlnlistic - vi 1 : to as- sume bodily fom1 2 o : 10 ap1iear esp. ~uddenly b : to come into ex.- isrcnc" - ma 0 te·ri 0 al·lz 0 or 11 

m oterlals science 11 ( 19$6): lhc scle11110c s1udy of tbe properties ond 11pplh:alions of mlllcrlals or construction or Dl3Uufacture (as cemml~. 

mc1111$, p0lymen;, nnd com1><>5ltes) - m a terials s cientis t 11 

m o•te·rla med·l·c a \m:>- tlr-C·:>· me·dl·k~\ n CNL. Iii .. mcdiettl matlcr] 

(1663) 1 : sut»tancc.~ used In the compo.'ltlon or mlldical remcdl~ 

: 011.uos. !l>tl!:DIO.NJl 2 a : a branch of medlcal science tlmt dents wilh the sources. nature, proponleo<, and 11reparat lon of dru gs b : a trea tise on matc:ria. medica ma.te.rl·el or ma-te·rl·el \m~ tir--! el\ n [F materiel, fr. materiel. adJ.J (1819): equipment. apparatws, a nd supplies used hy an organi:>:.ation o r institution me 0 tor0 nol \mo- 't~r- t\ oq/ (MB, fr. M P & MI.; MF matcm el. fr. ML maramnlls, fr. L 11111t(fr1111.t( rr. 11111ter mo1 hcr - more at Mo1·1m11.J (I Sc) 

1 : ()f, relnllng to, belong 118 to, or c h11metcrlslic o( Q mothur: M01'1<- lll:n .Y 2 a : rolutcd through 11 mother Ill~ ....., aunt) b : ln horllcd ot derived from ll1e female p:11·e11t <- 11e11es) - ma 0 ter•nOl•IY \-n•t-C\ ad•' 1me•ter·nl.ty o- '1 or-n~·tt\ r1.11f-tlas (16 ll) 1 a : the qu.al.hy or rnuc of being a mothtr : M0111nn11000 b : lhc quaUties or " mother : MOTllElUJNl!SS 2 : n hospltnl fociliiy designed for the care of wom- en before nnd during chlldblnh nnd for the care or newborn bnblcs 2motemlly atJi ( 1893) 1 : delilgned for wcnr during preanancy (a - dress) 2 : effective for the period close to and including childbirth (-leave) 

mat·ey \ 'mii·tC\ aiQ (1915) cltlflfly Orie : COMPANIONAIJL!; - mat·ey- noss \-n:is\ 11, d1lef/y Brit ' math \'matb\ n (ca. 1847): MATiiBMATICS 2math abbr mal11emu1tcal: mn1hcmntlclnn m oth·e·mat·l·cal \,math·'mn-ll·k91, 1mn-1h,,_\ also math·e·maMc \·tik\ aiQ [ME llllllhematlr".lla, fr. L marhemuticu.t, fr. Gk mathl· matikos, rr. mothi!mr:t·, m111/1i!m11 lenmlng, ma 1hcmalics, rr. 111u111lw -

11ei11 10 team; prob. 11kln co Co!h m11mlo11 to pay nt1entiou] (!Sc) 1 : o f, rclntlng lo, or nccoi·dJna with mn1hu11111tlos 2 a: dgo ronsly exacr : Pl\8ClSll b : CBR'fA1N 3 : pO!ISlhlc hut highly lm)ll'ohnblc (only n...., 

ohnnc(')- math•o•mot·l•col·IY \· ti·kfo·)lc\ "dv methematlcel expec tation 11 ( 11!38): BXPl!CTl!D VALUE mathoma.tlcal Induction /1 (1838) : INt>ucnoN 2h mathematlcol loglc 11 (1853): llYMOOt.tc t..001c math•e-mB·ll•clan mntb·m:i- tl-sh~1! 1 ,nia·lh:>-\ 11 (15c) : a spcd ttllS l or eltpcn In ma1hcmnllcs ma th·fl·mat·lca \ ,mnlh-'mn· llks. ,mn-th:>-\ 11 pl but u.r11 .rl11g 111 co11.11r (1$73) 1 : the science or numbers and their operations, intcrrdottlon~. 

comhlnMion.s. genenallzatlon~. &nd nb!.tmctions and of spn~-e coollHU· mllo11> and their structure, me11.SurCJ11cn1, 1nul3fonnatlo11.-. ~nd gener- alizations 2 : n brnnch or. opcrRtlnn In, or use of mnthemutks (the - or physical chemistry) math·e·ma 01f0 za 0 tlo n \.mn1b-1m>·la·' zA·shon. ,nm-tho-\ /1 (1908) : re- duction tO mathemttllcal fonn - m olh•O•m 8°tlze \'1nal1Hn:>-,tf1, 'm11- lh:>-\ vb maths \'mat11S\ 11111 (191 I) d1fcf/.y Brit: MA1'1t.nMATICS 

\a\ .. hut \ 8 \ kitton. F table \ar\ furlher \a\ ll8h \ii\ ace \a\ mop, mar 

\au\ out \ch\ chin \e\ bet \e\ easy \g\ go \l\ hit \i\ lee \j\Jol> 

\D\ ging \o\ go \6\ law \61\ hoy \lh\ thin \th\ the \il\ loot \u\ foot 

\y\ yet \:th\ vision, beigo \Is., •. oe, U>, >\.tee Guide lo Pronunciation 

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