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

Heading: cogs

Text: Having determined the meaning of “goods sold” in this context,4 we next turn to the question of which, if any, costs Sunstate is entitled to subtract in determining its taxable margin. We begin with Sunstate’s argument, relying on courts of appeals’ opinions, that subsection (k-1)’s use of the term “in relation to” entitles it to subtract any costs incurred that have some reasonable nexus to the goods. See Hegar v. Gulf Copper & Mfg. Corp., 535 S.W.3d 1, 12 (Tex. App.—Austin 2017, pet. granted); Titan Transp. LP v. Combs, 433 S.W.3d 625, 637 (Tex. App.—Austin 2014, pet. denied)). A reasonable nexus exists here, according to Sunstate, because the costs at issue were an “integral part” of renting out the heavy equipment, furthered the purpose of providing the equipment to the customers’ job sites, and the equipment typically could not have been rented without Sunstate paying those costs. Subsection (k-1) allows a taxable entity qualifying for a COGS subtraction to “subtract as cost of goods sold the costs otherwise allowable by this section in relation to tangible personal property that the entity rents or leases in the ordinary course of business of the entity.” TEX. TAX 3 Sunstate’s “goods” do not include any services, however, as the statute excludes services from the definition of “tangible personal property.” See TEX. TAX CODE § 171.1012(a)(3)(B)(ii). 4 In light of subsection (k-1)’s provision allowing rental and leasing companies a COGS subtraction despite not selling property in the ordinary course of business, we note that the term “cost of goods sold” is somewhat of a misnomer in this specific context. Nevertheless, we use that term and “COGS” to refer to the costs that can be subtracted pursuant to section 171.1012, as that is terminology used in the statute. 10 CODE § 171.1012(k-1). Thus, subsection (k-1) specifically limits the COGS subtraction to the COGS determination under other parts of section 171.1012. Id. While subsection (k-1) does use the term “in relation to,” there is nothing in that subsection that expands or alters the meaning of COGS or the types of costs included and excluded in COGS, as set out in section 171.1012(a) through (f). To the contrary, the statute very clearly provides that a heavy construction equipment rental or leasing company can subtract as COGS the costs that section 171.1012 allows as to equipment that is rented or leased out in the ordinary course of business. Sunstate further points to a court of appeals’ opinion interpreting the phrase “in connection with” from Texas Tax Code section 171.1011(g)(3) to assert that “in relation to” is a “phrase of intentional breadth” within franchise tax cases. See Titan Transp. LP, 433 S.W.3d at 637. Of course, we presume that the Legislature chose its words with care and used every phrase with a purpose, and where possible we give effect to every word and phrase so no part of a statute will be rendered meaningless. TEX. GOV’T CODE § 311.021(2); see City of Dall. v. TCI W. End, Inc., 463