Opinion ID: 4522636
Heading Depth: 2
Heading Rank: 1

Heading: Subsection (k-1)

Text: We begin by considering subsection (k-1), as Sunstate focused primarily on that provision in its motion for summary judgment and on appeal, and it was the primary focus of the court of appeals’ decision. See 578 S.W.3d at 537–40. Sunstate argues that subsection (k-1) allows companies that rent or lease out heavy construction equipment to subtract the costs associated with their business, including costs to deliver equipment to and pick equipment up from job sites. Subsection (k-1) allows certain entities to subtract costs “in relation to tangible personal property that the entity rents or leases in the ordinary course of business.” Id. § 171.1012(k-1). “[A] heavy construction equipment rental or leasing company” is one of three types of businesses entitled to the subtraction under this subsection. Id. § 171.1012(k-1)(2). Here, the parties stipulated that 8 Sunstate rents out heavy construction and industrial equipment and qualified as a heavy construction equipment rental or leasing company under section 171.1012(k-1)(2). There is no question that Sunstate is the type of entity that qualifies for a COGS subtraction under subsection (k-1). We next turn to what costs, if any, Sunstate is entitled to subtract as COGS under subsection (k-1). Sunstate categorizes the labor, fuel, depreciation, maintenance, and property tax costs related to its delivery and pick-up of equipment as direct costs that can be subtracted as COGS under section 171.1012(c). See id. § 171.1012(c)(1), (3), (6), (8), (11). It categorizes its insurance costs for delivery vehicles and the employees who operate those vehicles as additional costs which are “in relation to” the heavy construction equipment Sunstate rents out and can thus be subtracted as COGS under section 171.1012(d). See id. § 171.1012(d)(6). The Comptroller recategorized the costs at issue as administrative or overhead costs that could be subtracted under section 171.1012(f), subject to statutory limitations. See id. § 171.1012(f). The court of appeals concluded that the costs at issue could not properly be included in the COGS subtraction and were more akin to costs excluded under section 171.1012(e). 578 S.W.3d at 540; see TEX. TAX CODE § 171.1012(e). To determine what costs Sunstate could subtract as COGS, we begin with the statutory definitions. The statute defines “goods” 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). There is no dispute that in this case, the “tangible personal property” is the heavy construction and industrial equipment that Sunstate rents to its customers. Generally, a taxable entity must sell property (real or personal) that it owns to be entitled to a COGS subtraction. Id. § 171.1012(a)(1), (i). However, with subsection (k-1), the Legislature provided that certain taxable entities that do not sell their 9 goods but only rent or lease them nevertheless qualify for a COGS subtraction, just as a retailer would. Id. § 171.1012(k-1). Under section 171.1012(k-1), Sunstate’s “goods” are the heavy construction and industrial equipment that it rents in the ordinary course of business.3