Source: https://saltblog.eidebailly.com/2014/12/
Timestamp: 2019-04-25 03:01:06+00:00

Document:
	Titan Transportation v. Combs – Taxpayer win. Titan Transportation engaged in hauling and transporting aggregate. Court concluded that revenue exclusions allowed if there is a reasonable nexus between materials, service or labor provided and the actual/proposed design, construction, remodel, repair or location of boundaries of real property. No requirement/limitation for taxable entities to be “construction companies,” make a physical change to real property, tracing of payments, or written agreement referencing subcontractor will provide materials, labor, services to customer.
o	Taxable entity may claim COGS deduction when it doesn’t own/sell goods when it furnishes labor/materials to a project for construction, improvement, remodel, repair or industrial maintenance of real property.
	Combs v. Newpark Resources (2013) – Taxpayer win. NewPark and its subsidiaries (combined group) provided integrated oilfield services. One sub sold and injected drilling mud. One sub transported waste mud from drilling site and disposed. Court held that waste sub was component of larger group providing integrated services and eligible to claim COGS deduction because waste removal was necessary and essential to the continued construction and drilling of oil & gas well sites. Court rejected Comptroller’s position that taxable entity must be construction company or oil & gas well driller, making physical change to real property site in order to claim COGS deduction.
	Newpark – Court decision also implies 4% cap on overhead is calculated on a combined basis.
o	Texas combined reporting – requires taxable entities to be a part of an affiliated group engaged in a unitary business instead of reporting as separate taxable entities.
o	Combined group chooses to either deduct COGS, compensation or 30% of total revenues; apportions its margin to Texas; computes and pays franchise tax as a single entity.
	Supremacy doctrine – federal law supersede those of conflicting provisions found in state law, including Texas state law that expressly states that it is not an income tax and that P.L. 86-272 does not apply.
	Many commentators (including former Comptroller Strayhorn) believe the revised franchise tax is a net income tax.
o	Comptroller policy/rule imposes conditions beyond plain language of statute – to qualify as a management company, an entity must perform active and substantial management and operational functions; control and direct daily operations; provide services such as accounting, general admin, legal, finance and other similar services.
o	Litigation/Comptroller position – Comptroller consistently rejected taxpayers’ request to use three-factor formula under premise that franchise tax is not a an income tax.
	Lead Texas case Graphic Packaging Corp v. Combs (case presently pending appeal before the 3rd Cir. App) Taxpayer lost at trial level.
o	Revenue exclusion for funds that taxpayer must distribute to others as a result of a fiduciary or statutory duty.
o	Two cases pending in Texas courts may help resolve scope of this exclusion.
	Seltex v. Combs – addresses whether this provision allows a freight broker that serves as a limited agent for its customers to exclude the customer payments it flows through to haulers.
	BASA Resources v. Combs – addresses whether this provision allows a taxpayer that owns working interests in oil & gas leases and sells a net profits interest to another entity to exclude the net profits distributions it makes. Taxpayer sold 96% net profits interest in leases to another entity and excluded the amounts of its net profits distributions from total revenue and the Comptroller denied the exclusion. Comptroller settled the case before trial.
	Also included is net distributive income: allowance for service businesses – (e.g., law and accounting firms) that compensate partner-employees in whole or in part through partnership distributions. Net distributive losses, taxable entity may be forced to reduce compensation by the loss (i.e., anti-abuse rules for net distributive income).
o	Benefits – in addition to wages/cash compensation, Texas tax code allows an entity to deduct benefits as compensation. However, benefits not defined in statute or Comptroller rules.
	Winstead (March 2013) – district court case ruled that the working condition disallowance provision in Comptroller rule 3.589(e)(2)(D) is invalid to the extent it disallows deductions that are allowed for federal income tax purposes.
o	Autohaus v. Combs (2014) Taxpayer win. Court ruled that an auto dealer could include labor costs to install new and replacement auto parts in its cost of goods sold for Texas franchise tax purposes. This case is a big win for taxpayers that, if it becomes final, could allow many taxpayers to include labor costs in cost of goods sold that the Texas Comptroller previously denied.
o	Richmond Aviation v. Combs (2013) Taxpayer able to bring case to court without paying in Texas. Appellate court ruled that Texas Constitution imposed unreasonable financial barriers to court access even though the statute excused prepayment for indigent taxpayers.
We got a bounded book that outlines these topics but no slides. I asked for slides and will forward on if I can get a copy.
Tram Le, CPA, J.D., LL.M.
Arizona Construction Contractors Sales Tax Changes Are Coming!

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