Court Opinion

ID: 4908488
Source: CourtListenerOpinion
Date Created: 2021-09-06 07:30:57.901869+00
Date Added: 2024-06-11T08:13:15.616410
License: Public Domain

Affirmed and Opinion filed August 31, 2021.

                                       In The

                     Fourteenth Court of Appeals

                               NO. 14-19-00358-CV

  GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF THE
  STATE OF TEXAS; AND KEN PAXTON, ATTORNEY GENERAL OF
               THE STATE OF TEXAS, Appellants

                                          V.

                       XEROX CORPORATION, Appellee

                    On Appeal from the 201st District Court
                             Travis County, Texas
                    Trial Court Cause No. D-1-GN-17-003974

                                   OPINION
      In this franchise-tax dispute, the taxable entity paid franchise taxes under
protest and brought suit asserting that the franchise tax rate applicable to the entity
during Report Years 2008 and 2009 was 0.5% rather than 1.0%. The Comptroller
of Public Accounts of the State of Texas and the Attorney General of the State of
Texas counterclaimed, asserting that the taxable entity’s cost-of-good-sold
deduction should have been less than the amounts reported by the entity in each of
these years. The trial court ruled in the taxable entity’s favor on its claims and
ordered that the defendants take nothing on their counterclaims. On appeal, the
defendants assert that the trial court erred in determining that the applicable
franchise tax rate during the time period at issue was 0.5% rather than 1.0% and
that the trial court erred in rendering a take-nothing judgment on their
counterclaim. We affirm the trial court’s judgment.

                   I. FACTUAL AND PROCEDURAL BACKGROUND

      Following an audit, appellant/defendant Glenn Hegar, the Comptroller of
Public Accounts of the State of Texas (the “Comptroller”) determined that the
applicable franchise tax rate for appellee/plaintiff Xerox Corporation for Report
Years 2008 and 2009 (the “Time Period at Issue”) was 1.0% rather than 0.5%.
Xerox had used the 0.5% tax rate to compute its franchise tax during the Time
Period at Issue because Xerox contended that it was primarily engaged in
wholesale trade under Texas Tax Code section 171.002(c) during this time period.
The Comptroller disagreed with this contention. In June 2017, the Comptroller
assessed more than $2.1 million against Xerox in franchise tax and interest for
Report Year 2008 and more than $2.2 million in franchise tax and interest for
Report Year 2009. Xerox paid the assessed amounts under protest and filed this
suit under Chapters 112 and 171 of the Texas Tax Code to recover the disputed
amounts.

      Xerox sued the Comptroller and appellant/defendant Ken Paxton, Attorney
General of the State of Texas (collectively, the “Comptroller Parties”). The
Comptroller Parties filed a counterclaim against Xerox alleging that during the
                                         2
Time Period at Issue Xerox had overstated its cost of goods sold (“COGS”). The
Comptroller Parties alleged that during each report year Xerox’s COGS deduction
should have been much less than the amount reported by Xerox. The Comptroller
Parties argued that the amount of Xerox’s COGS was less than thirty percent of its
total revenue for each report year.

      The case proceeded to a bench trial at which three witnesses testified and
documentary evidence was admitted. The trial court rendered judgment in favor of
Xerox and against the Comptroller Parties. The trial court ordered the Comptroller
Parties to issue one or more refund warrants to Xerox in the amount of $4,349,568,
the total amount that Xerox had paid under protest for Time Period at Issue. The
trial court also ordered the Comptroller Parties to pay statutory interest on that
amount under Chapter 112 of the Texas Tax Code. The trial court ordered that the
Comptroller Parties take nothing on their counterclaim.

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

   1. Xerox is primarily engaged in the retail and wholesale distribution of high-
      end printing and publishing systems, digital multifunctional divisions, digital
      copiers, laser and solid ink printers, fax machines, document management
      software, and supplies such as toner, paper, and ink.
   2. Xerox’s chief business purpose and function was to sell its various types of
      business equipment and supplies, which in some cases involved the use of
      lease contracts.
      ...
   10.During the period at issue, Xerox offered a variety of distribution
      agreements to meet its customers’ needs. Xerox’s primary distribution
      agreements were purchase agreements, finance leases (sales-type leases),
      operating leases, rental agreements, and bundled arrangements.
   11.All of Xerox’s equipment was available for sale in the ordinary course of
      business for customers to acquire through a purchase agreement, sales-type
      lease, operating lease, rental agreement, or bundled arrangement.

                                          3
12.Under purchase agreements, customers took title to the equipment, bore the
   risk of loss, and insured the equipment.
13.Under a sales-type lease, customers were required to make all payments
   under the lease (even if contract was terminated), bore the risk of loss on the
   equipment, and insured the equipment.
14.Xerox examined its sales-type leases with its customers to determine
   whether they should be treated as a sale under Financial Accounting
   Standard (“FAS”) 13 and recorded the sales revenue at the inception of the
   lease.
15.Xerox’s lease terms of its sales-type leases were generally for the entirety of
   the economic life of the equipment (five years).
16.Xerox also performed calculations at the inception of each lease to establish
   what residual value in the equipment will remain at the end of the lease term
   to ensure that 90 percent of fair value is covered during the lease term.
17.Xerox’s sales-type leases satisfied subparagraphs c and/or d of Paragraph 7
   of FAS 13.
18.The collectability of the minimum lease payments is reasonably predictable
   because Xerox ensured the lease agreements included non-cancelable
   provisions and cancellation penalties equaling the full value of the lease
   receivables.
19.Xerox’s leases provided for standard warranties in accordance with the
   industry’s common practices.
20.Under an operating lease, customers were required to make all payments
   (even if the contract was terminated), bore the risk of loss on the equipment,
   and insured the equipment. The main difference between a sales-type lease
   and an operating lease was that the lease term of an operating lease was less
   than the useful life of the equipment and the lack of reasonably assured
   collectability.
21.Under a rental agreement, the term was generally shorter than the usual life
   of the equipment. Therefore, Xerox’s rental agreements were not classified
   as sales-type leases. . .
22. A bundled arrangement allowed customers to contract for all their print
   production needs (equipment, paper, toner, maintenance) in a single
   agreement for a negotiated monthly price. Typically, these arrangements
   include an incremental, variable component for page volumes in excess of

                                      4
   contractual page volume minimums, which are often expressed in terms of
   price per page.
23.Revenues under these arrangements were allocated based upon the estimated
   fair values of each element, considering the relative fair values of the lease,
   and non-lease deliverables included in the bundled arrangement. Lease
   deliverables included maintenance and executory costs, equipment, and
   financing, while non-lease deliverables generally consisted of supplies and
   non-maintenance services.
   ...
26.For [Report Year] 2008, Xerox had total revenues of $9,737,522,675.
   $3,320,550,884 was related to cash sales for equipment, supplies, and paper,
   $1,869,848,142 was related to sales-type leases for equipment only,
   $281,232,751 was related to operating leases, $2,006,360,936 was related to
   sales of maintenance services, $1,435,028,204 was related to sales of
   managed services (print production), $489,770,719 was related to financing
   revenue, and $334,731,039 was related to other training, licensing, and
   commission revenue.
27.For [Report Year] 2008, $7,605,175,730 was revenue from wholesale trade
   activities. The $7,605,175,730 is comprised of $3,320,550,884 [which] was
   related to cash sales for equipment, supplies, and paper, $1,869,848,142
   [which] was related to sales-type leases for equipment only, $489,770,719
   [which] was related to financing revenue, and $2,006,360,936 [which] was
   related to sales of maintenance services. This revenue was properly
   classified in Division F of the Standard Industrial Classification (“SIC”)
   Manual.
28.For [Report Year] 2008, 78.10% ($7,605,175,730/$9,737,522,675) of
   Xerox’s total revenue was from wholesale distribution activities.
   ...
31.For [Report Year] 2009, Xerox had total revenues of $10,510,116,487.
   $3,824,324,449 was related to cash sales for equipment, supplies, and paper,
   $2,135,586,310 was related to sales-type leases for equipment only,
   $336,781,105 was related to operating leases, $2,021,146,603 was related to
   sales of maintenance services, $1,368,826,388 was related to sales of
   managed services (print production), $446,790,465 was related to financing
   revenue, and $376,643,167 was related to other training, licensing, and
   commission revenue.

                                      5
32.For [Report Year] 2009, $8,354,317,373 was revenue from wholesale trade
   activities. The $8,354,317,373 is comprised of $3,824,324,449 [which] was
   related to cash sales for equipment, supplies, and paper, $2,135,586,310
   [which] was related to sales-type leases for equipment only, $446,790,465
   [which] was related to financing revenue, and $2,021,146,603 [which] was
   related to sales of maintenance services. This revenue was properly
   classified in Division F of the SIC Manual.
33.For [Report Year] 2009, 79.49% ($8,354,317,373/$10,510,116,487) of
   Xerox’s total revenue was from wholesale trade activities.
...
37. For [Report Year] 2008, Xerox originally reported a [t]otal COGS
   subtraction of $4,910,835,415.
38.Costs of print production, services, and rentals were not included in Xerox’s
   Texas COGS on its [Report Year] 2008 franchise tax return.
39.As requested by [the Comptroller Parties], Xerox reviewed and updated its
   COGS subtraction calculation. Upon review, Xerox determined that its
   [t]otal COGS subtraction for [Report Year] 2008 should have been
   $5,994,240,999.
40.For [Report Year] 2009, Xerox originally reported a [t]otal COGS
   subtraction of $4,995,383,684.
41.Costs of print production, services, and rentals were not included in Xerox’s
   Texas COGS on its [Report Year] 2009 franchise tax return.
42.As requested by [the Comptroller Parties], Xerox reviewed and updated its
   COGS subtraction calculation. Upon review, Xerox determined that its
   [t]otal COGS subtraction for [Report Year] 2009 should have been
   $6,647,888,992.
43.Testimony at trial established that [research and development] and Sustained
   Engineering (“SE”) costs are not bifurcated by the type of distribution
   agreement that is used by the customer to acquire equipment. All [research
   and development] and SE costs related to a piece of equipment which were
   [sic] required to create that equipment.
44.Costs related to equipment sold through a sales-type lease were not included
   in Xerox’s COGS calculations for [Report Years] 2008 and 2009.
45.[The Comptroller Parties] failed to prove that 30% of Xerox’s total revenue
   is greater than Xerox’s COGS for [Report Year] 2009.
                                     6
   The trial court issued the following conclusions of law:

47.Based on the analysis in FAS 13 and Rent-A-Center [v. Hegar], 468 S.W.3d
   220 (Tex. App.—Austin 2015, no pet.), the revenue from Xerox’s sales-type
   leases is properly classified as sales revenue (wholesale trade revenue)
   because the sales-type leases are more like sales than leases.
48.For [Report Year] 2008, $7,605,175,730 was revenue from wholesale trade
   activities. The $7,605,175,730 is comprised of $3,320,550,884 [which] was
   related to cash sales for equipment, supplies, and paper, $1,869,848,142
   [which] was related to sales-type leases for equipment only, $489,770,719
   [which] was related to financing revenue, and $2,006,360,936 [which] was
   related to sales of maintenance services. This revenue was properly
   classified in Division F of the Standard Industrial Classification (“SIC”)
   Manual, satisfying Tex. Tax Code §171.0001(18).
49.For [Report Year] 2009, $8,354,317,373 was revenue from wholesale trade
   activities. The $8,354,317,373 is comprised of $3,824,324,449 [which] was
   related to cash sales for equipment, supplies, and paper, $2,135,586,310
   [which] was related to sales-type leases for equipment only, $446,790,465
   [which] was related to financing revenue, and $2,021,146,603 [which] was
   related to sales of maintenance services. This revenue was properly
   classified in Division F of the SIC Manual, satisfying Tex. Tax Code
   §71.0001(18).
50.For [Report Years] 2008 and 2009, Xerox’s maintenance revenue is properly
   classified in Division F of the SIC Manual because, as outlined in Division I,
   it is a specialized service closely allied to activities covered in other
   divisions (Division F) and therefore, classified in such division.
51.For [Report Year] 2008, 78.10% ($7,605,175,730/$9,737,522,675) of
   Xerox’s total revenue was from wholesale distribution activities, thereby
   satisfying Tex. Tax Code § 171.002(c)(1).
52.Of the $7,605,175,730 in revenue from wholesale trade activities,
   $1,381,255,637, or 18.16%, was wholesale trade revenue from products
   produced by Xerox or a Xerox affiliate, thereby satisfying Tex. Tax Code
   §171.002(c)(2).
53.For [Report Year] 2009, 79.49% ($8,354,317,373/$10,510,116,487) of
   Xerox’s total revenue was from wholesale distribution activities, thereby
   satisfying Tex. Tax Code § 171.002(c)(2).

                                      7
   54.Of the $8,354,317,373 in revenue from wholesale trade activities,
      $1,236,709,444, or 14.80%, was wholesale trade revenue from products
      produced by Xerox or a Xerox affiliate, thereby satisfying Tex. Tax Code
      §171.002(c)(2).
   55.Xerox did not provide retail or wholesale utilities, including
      telecommunications services, electricity, or gas, thereby satisfying Tex. Tax
      Code § 171.002(c)(3).
   56.By satisfying the requirements outlined in Tex. Tax Code § 171.002(c),
      Xerox properly used the 0.5% franchise tax rate for [Report Years] 2008 and
      2009.
   ...
   57.Xerox properly calculated and subtracted costs related to the outlined items
      in Tex. Tax Code § 171.1012(c).
   58.Xerox properly calculated and subtracted costs related to the outlined items
      in Tex. Tax Code § 171.1012(f) and Comptroller Rule 3.588(f).
   59.Xerox properly calculated and subtracted costs related to the outlined items
      in Tex. Tax Code § 171.1012(d).
   60.Xerox’s mixed transaction costs qualify for COGS under Comptroller Rule
      3.588(c)(7).
   61.Tax Code § 171.1012(k-1) is inapplicable to Xerox.
   62.For [Report Year] 2008, under Tex. Tax Code §§ 171.101(a) and 171.1012,
      [the Comptroller Parties] have failed to meet [their] burden of proof as a
      matter of law that Xerox’s COGS were less than 30% of Xerox’s total
      revenue.
   63.[For Report Year 2009] Xerox’s total revenue multiplied by 30% was
      $3,201,418,233. As a matter of law, [the Comptroller Parties] have failed to
      meet [their] burden of proof that 30% of Xerox’s total revenue is greater
      than Xerox’s COGS.
                               II. ISSUES AND ANALYSIS

         The Comptroller Parties timely appealed the trial court’s judgment. The
Supreme Court of Texas ordered this case transferred to the Fourteenth Court of

                                         8
Appeals from the Third Court of Appeals.1 The Comptroller Parties present two
issues on appeal. In their first issue, they challenge the trial court’s take-nothing
judgment on their counterclaim. In their second issue, they challenge the trial
court’s rendition of judgment in favor of Xerox on its claims against the
Comptroller Parties.

A.     Have the Comptroller Parties shown that the trial court erred in
       concluding that the 0.5% franchise-tax rate applied to Xerox during the
       Time Period at Issue?
       In their second issue, the Comptroller Parties assert that Xerox is not entitled
to the reduced franchise tax rate allowed for taxpayers “primarily engaged in retail
or wholesale trade” because a majority of its revenue is from leasing equipment
and providing services, not from the “sale” of goods. During the Time Period at
Issue, there were two franchise tax rates: 1% and 0.5%. See Act of May 2, 2006,
ch. 1, § 2, 2006 Tex. Gen. Laws 1, 6–7 (codified at Tex. Tax Code § 171.002). To
qualify for the lower 0.5% rate, Xerox must have been “primarily engaged in retail
or wholesale trade” during the Time Period at Issue. See id. Xerox does not
contend that it was primarily engaged in retail trade during the Time Period at
Issue. Instead, Xerox contends, and the trial court found, that during the Time
Period at issue, Xerox was primarily engaged in wholesale trade.

       For Xerox to have been primarily engaged in wholesale trade, among other
things, the total revenue from its activities in wholesale trade must have been
greater than the total revenue from its activities in trades other than the wholesale
trade. Id. The trial court found that in Report Year 2008 and in Report Year 2009,

1In transfer cases, the transferee court must decide the appeal in accordance with the precedent
of the transferor court under principles of stare decisis if the transferee court’s decision otherwise
would have been inconsistent with the precedent of the transferor court. See Tex. R. App.
P. 41.3.
                                                  9
the total revenue from Xerox’s activities in wholesale trade was greater than the
total revenue from Xerox’s activities in trades other than the wholesale trade.
During the Time Period at Issue, “wholesale trade” for franchise-tax purposes
meant “the activities described in Division F of the 1987 Standard Industrial
Classification Manual published by the federal Office of Management and Budget”
(hereinafter, “Division F”). Tex. Tax Code Ann. § 171.0001(18) (West, Westlaw
through 2021 R.S.). Division F “includes establishments or places of business
primarily engaged in selling merchandise to retailers; to industrial, commercial,
institutional, farm, construction contractors, or professional business users; or to
other wholesalers. . . .” Division F does not contain a definition of “selling.”
According to Xerox, establishments selling merchandise to essentially anyone
other than personal consumers are engaged in wholesale trade under Division F. In
Conclusion of Law 47, the trial court determined that the revenue from Xerox’s
sales-type leases under FAS 13 is properly classified as revenue from sales falling
within the scope of wholesale trade under Division F. The Comptroller Parties
assert that the trial court erred in concluding that the sales-type leases should be
treated as sales. The Comptroller Parties focus on the common meaning of
“selling” under Division F.

     1. Standard of Review
      We review the trial court’s conclusions of law de novo, and its findings of
fact for sufficiency of the evidence. Hegar v. American Multi-Cinema, Inc., 605
S.W.3d 35, 40 (Tex. 2020). When reviewing the legal sufficiency of the evidence,
we consider the evidence in the light most favorable to the challenged finding and
indulge every reasonable inference that would support it. City of Keller v.
Wilson, 168 S.W.3d 802, 823 (Tex. 2005). We must credit favorable evidence if a
reasonable factfinder could and disregard contrary evidence unless a reasonable

                                        10
factfinder could not. See id. at 827. We must determine whether the evidence at
trial would enable reasonable and fair-minded people to find the facts at
issue. See id. The factfinder is the only judge of witness credibility and the weight
to give to testimony. See id. at 819.

      2. The Ordinary Meaning of “selling” as used in Division F
       The Legislature incorporated Division F into the Texas Tax Code as the
definition of “wholesale trade.” See Tex. Tax Code Ann. § 171.0001(18). The
Legislature has not provided a statutory definition of “selling.” The parties do not
assert that “selling” has a technical or particular meaning, and research has not
revealed any Texas cases showing that this term has any such technical or
particular meaning. In addition, no different, more limited, or precise definition of
selling is apparent from the term’s use in this statutory context. See State v.
$1,760.00 in U.S. Currency, 406 S.W.3d 177, 180 (Tex. 2013) (per curiam).
Therefore, we construe the term “selling” based on its ordinary meaning. See
American Multi-Cinema, Inc., 605 S.W.3d at 41–42; City of San Antonio v.
Hartman, 201 S.W.3d 667, 672, n. 19 (Tex. 2006).

       The Comptroller Parties argue that the under the ordinary meaning of
“selling,” selling takes place only when there is a transfer of title to property for a
price.2 The Comptroller Parties cite the Legislature’s definition of “sale” in article
2 of the Uniform Commercial Code. See Tex. Bus. & Comm. Code Ann. §
2.106(a) (West, Westlaw through 2021 R.S.). Under this definition, a “sale”
consists in the passing of title from the seller to the buyer for a price. See id. Xerox
asserts that transfer or passing of title is not necessary, and that this court should be

2 The Comptroller Parties incorporate their arguments under the first issue as to the ordinary
meaning of “sold” in Tax section 171.1012(a) into their arguments under the second issue as to
the ordinary meaning of “selling” in Division F.
                                             11
guided by the statutory definition of “sale” in the Limited Sales, Excise, and Use
Tax Act, in which “sale” is broadly defined to include the exchange, lease, or
rental of tangible personal property. See Tex. Tax Code Ann. § 151.005(2)
(West, Westlaw through 2021 R.S.).

      The parties have not cited and research has not revealed a case in which the
court determines the meaning of “selling,” as used in Division F. The parties have
not cited and research has not revealed a Texas case in which the court determines
the ordinary meaning of “selling,” “sold,” or “sale.” In American Multi-Cinema,
Inc., the Supreme Court of Texas held that the ordinary meaning of “sold” as used
in Tax section 171.1012(a) requires a transfer, but the court did not specifically
determine what the ordinary meaning of “sold” was in the context of that case. See
American Multi-Cinema, Inc., 605 S.W.3d at 41–42. Thus, the issue of whether the
ordinary meaning of “selling,” “sold,” or “sale” requires the transfer or passage of
title appears to be an issue of first impression in Texas. The Legislature could have
defined “selling” in this context as requiring the passage of title, as the Legislature
did in section 2.106(a) of the Business and Commerce Code, or the Legislature
could have defined “selling” in this context as not requiring the passage of title, as
the Legislature did in the Limited Sales, Excise, and Use Tax Act. See Tex. Tax
Code Ann. § 151.005(2); Tex. Tax Code Ann. § 151.005(2). However, the
Legislature chose not to provide an express definition of “selling,” and the
definitions from other statutes cited by the parties do not purport to state the
ordinary meaning of “selling” or “sale.” In the context of this case, the
Legislature’s failure to provide a statutory definition of “selling” requires us to
determine whether the ordinary meaning of the term “selling” requires the transfer
or passage of title for “selling” to occur. See American Multi-Cinema, Inc., 605
S.W.3d at 41–42; Hartman, 201 S.W.3d at 672, n.19. After careful consideration,

                                          12
we conclude that ordinary meaning of “selling,” “sold,” or “sale” does not require
the transfer or passage of title, though it does require the transfer of the item being
sold. See American Multi-Cinema, Inc., 605 S.W.3d at 41–42 (holding that
ordinary meaning of “sold” requires a transfer and citing favorably definitions of
“sold” that do not require a transfer of title); Sale, The American
Heritage Dictionary of the English Language (5th ed.) (defining “sale” as “an
exchange of goods or services for an amount of money or its equivalent”); Sale,
Black’s Law Dictionary (11th ed. 2019) (defining “sale” as “[t]he transfer of
property or title for a price”) (emphasis added); Transfer, Black’s Law Dictionary
(11th ed. 2019) (defining “transfer” as “[a]ny mode of disposing of or parting with
an asset or an interest in an asset”); see also State v. Medina, 536 S.W.3d 528, 533
(Tex. App.—San Antonio 2017, pet. ref’d) (holding, in a criminal appeal, that the
ordinary meaning of “sale” is “to give or agree to give something to someone in
exchange for money, i.e., transferring property from one person to another for a
price”).3 Therefore, we reject the Comptroller Parties’ argument that Xerox’s sales-
type leases cannot fall within the scope of Division F because these leases do not
involve any transfer of title.

      3. The trial court’s determination that revenue from Xerox’s sales-type
         leases constitutes wholesale trade revenue.
       In Conclusion of Law 47, the trial court determined that the revenue from
Xerox’s sales-type leases under FAS 13 is properly classified as revenue from
sales falling within the scope of wholesale trade under Division F. The Comptroller
Parties contend that the trial court erred in making this conclusion of law.

3
 The Comptroller Parties cite the Third Court of Appeals’s opinion in Hegar v. Sunstate Equip.
Co., LLC. See 578 S.W.3d 533, 542–43 (Tex. App.—Austin 2017), aff’d, 601 S.W.3d 685 (Tex.
2020). The court in that case did not address the meaning of “selling,” “sold,” or “sale.” See id.
                                               13
      Under Financial Accounting Standard 13, a sales-type lease must satisfy one
of the four criteria in Paragraph 7 and both of the criteria in Paragraph 8. The
criteria in Paragraph 7 are:

      a. The lease transfers ownership of the property to the lessee by the
      end of the lease term (as defined in paragraph 5(f)).
      b. The lease contains a bargain purchase option (as defined in
      paragraph 5(d)).
      c. The lease term (as defined in paragraph 5(f)) is equal to 75 percent
      or more of the estimated economic life of the leased property (as
      defined in paragraph 5(g)). However, if the beginning of the lease
      term falls within the last 25 percent of the total estimated economic
      life of the leased property, including earlier years of use, this criterion
      shall not be used for purposes of classifying the lease.
      d. The present value at the beginning of the lease term of the
      minimum lease payments (as defined in paragraph 5(j))), excluding
      that portion of the payments representing executory costs such as
      insurance, maintenance, and taxes to be paid by the lessor, including
      any profit thereon, equals or exceeds 90 percent of the excess of the
      fair value of the leased property (as defined in paragraph 5(c)) to the
      lessor at the inception of the lease over any related investment tax
      credit retained by the lessor and expected to be realized by him.
      However, if the beginning of the lease term falls within the last 25
      percent of the total estimated economic life of the leased property,
      including earlier years of use, this criterion shall not be used for
      purposes of classifying the lease. A lessor shall compute the present
      value of the minimum lease payments using the interest rate implicit
      in the lease (as defined in paragraph 5(k)). A lessee shall compute the
      present value of the minimum lease payments using his incremental
      borrowing rate (as defined in paragraph 5(1)), unless (i) it is
      practicable for him to learn the implicit rate computed by the lessor
      and (ii) the implicit rate computed by the lessor is less than the
      lessee's incremental borrowing rate. If both of those conditions are
      met, the lessee shall use the implicit rate.
The trial court found that Xerox’s sales-type leases satisfied either Paragraph 7(c)
or 7(d) above, and no party has challenged this finding on appeal. To constitute a

                                          14
sales-type lease under FAS 13, a lease must also satisfy both of the following
criteria:

       a. Collectibility of the minimum lease payments is reasonably
       predictable. A lessor shall not be precluded from classifying a lease as
       a sales-type lease or as a direct financing lease simply because the
       receivable is subject to an estimate of uncollectibility based on
       experience with groups of similar receivables.
       b. No important uncertainties surround the amount of unreimbursable
       costs yet to be incurred by the lessor under the lease. Important
       uncertainties might include commitments by the lessor to guarantee
       performance of the leased property in a manner more extensive than
       the typical product warranty or to effectively protect the lessee from
       obsolescence of the leased property. However, the necessity of
       estimating executory costs such as insurance, maintenance, and taxes
       to be paid by the lessor (see paragraphs 17(a) and 18(a)) shall not by
       itself constitute an important uncertainty as referred to herein.
The trial court found that Xerox’s sales-type leases satisfied the first criterion, and
Xerox contends that the trial court’s Finding of Fact 19 shows that its sales-type
leases satisfied the second criterion. The Comptroller Parties do not contend that
the sales-type leases did not satisfy the above two criteria.

       Under the terms of the sales-type leases, unless the lessee exercises its
option to “purchase” the leased equipment, title to the leased equipment remains
with Xerox, and the lessee must return the equipment to Xerox at the end of the
term. The lessee may not cancel or terminate the lease and is responsible to pay all
payments under the lease for the full term of the lease, which trial evidence showed
was for the useful life of the equipment. Though the lessees have the option to
“purchase” the equipment at the end of the lease term, trial evidence showed that
“[m]ost equipment is returned by lessees at or near the end of the contracted term”
and “[t]he equipment is typically scrapped. I mean, it has no value the way it is.”

                                          15
      Xerox relies upon the Third Court of Appeals’s opinion in Rent-A-Center,
Inc. v. Hegar, and the Comptroller Parties argue that this case is not on point. See
468 S.W.3d 220, 222–25 (Tex. App.—Austin 2015, no pet.). The Rent-A-Center
court indicated that franchise-tax consequences are based on the transaction’s
substance rather than its form and that the substance of various rent-to-own
contracts were sales within the meaning of Division G of the 1987 Standard
Industrial Classification Manual incorporated into Tax Code section 171.0001(12)
for use in determining whether the taxable entity was primarily engaged in retail
trade under Texas Tax Code section 171.002(c). See id. Nonetheless, the facts in
Rent-A-Center were significantly different from the facts in today’s case, and we
presume that the Rent-A-Center case is not on point.

      Courts must base their analysis on the substance, not the form of the
transaction. See Gulf Chemical & Metallurgical Corp. v. Hegar, 460 S.W.3d 743,
749–50 & n.10 (Tex. App.—Austin 2015, no pet.). The Supreme Court of Texas
has instructed that in the area of tax law, courts should consider the essence of the
transaction, and courts should not disregard the economic realities underlying the
transactions in issue. See Combs v. Roark Amusement & Vending, L.P., 422
S.W.3d 632, 637 & n.14 (Tex. 2013); H.B. Aviation, LLC v. Hegar, No. 03-19-
00414-CV, 2020 WL 6811993, at *7 (Tex. App.—Austin Nov. 20, 2020, pet. filed)
(considering the economic realities of the transaction in determining whether a sale
occurred under the use-tax statute) (mem. op.). Though the sales-type leases stated
that they were leases and did not state that they were sales, courts give effect to the
substance of the transactions not the form. See Gulf Chemical & Metallurgical
Corp., 460 S.W.3d at 749–50 & n.10.

     The trial court did not err in effectively concluding that the substance of
Xerox’s sales-type leases falls within the scope of Division F and thus constitutes
                                          16
wholesale trade under Tax Code section 171.0001(18). See Tex. Tax Code Ann. §
171.0001(18); Roark Amusement & Vending, L.P., 422 S.W.3d at 637 & n.14; Gulf
Chemical & Metallurgical Corp., 460 S.W.3d at 749–50 & n.10. The trial court did
not err in concluding that it was proper to classify the revenue from Xerox’s sales-
type leases under FAS 13 as revenue from sales falling within the scope of
wholesale trade under Division F.4 See Tex. Tax Code Ann. § 171.0001(18); Roark
Amusement & Vending, L.P., 422 S.W.3d at 637 & n.14; Gulf Chemical &
Metallurgical Corp., 460 S.W.3d at 749–50 & n.10.

      4. The Comptroller Parties’ argument that Tax Code section 171.002(c)(1)
         is an exemption.
      The Comptroller Parties assert that we should strictly construe Tax Code
section 171.002(c)(1) against Xerox because this statute is tantamount to
an exemption. The Supreme Court of Texas has previously held that
tax exemptions must be construed strictly because “they are the antithesis of
equality and uniformity and because they place a greater burden on other taxpaying
businesses and individuals.” Bullock v. Nat'l Bancshares Corp., 584 S.W.2d 268,
272 (Tex. 1979) (citation omitted). But Chapter 171 makes clear that Tax Code
section 171.002(c)(1) is not an exemption. The franchise tax is levied on a taxable
entity’s “taxable margin.” Tex. Tax Code Ann. § 171.002. It is not a tax on
revenue. Sunstate Equip. Co., LLC. v. Hegar, 601 S.W.3d 685, 690 (Tex. 2020).
Tax Code section 171.002(c)(1) is part of the determination of the applicable
franchise-tax rate. See Tex. Tax Code Ann. § 171.002. Determining that a lower
franchise-tax rate applies does not “exempt” or “deduct” otherwise taxable

4
  The Comptroller Parties cite the Third Court of Appeals’s opinion in Hegar v. Sunstate Equip.
Co., LLC. See 578 S.W.3d 533, 542–43 (Tex. App.—Austin 2017), aff’d, 601 S.W.3d 685 (Tex.
2020). The court in that case did not address any issue regarding sales-type leases under FAS 13
or the scope of the definition of wholesale trade. See id.
                                              17
amounts from taxation. See Sunstate Equip. Co., LLC., 601 S.W.3d at 690. Instead,
the determination of the applicable franchise-tax rate is how the amount subject to
tax is ascertained in the first place. See Tex. Tax Code Ann. § 171.002; Sunstate
Equip. Co., LLC., 601 S.W.3d at 690. We conclude that Tax Code section
171.002(c)(1) is not tantamount to an exemption, and we do not strictly construe
the statute against Xerox. See Sunstate Equip. Co., LLC., 601 S.W.3d at 690.

     5. The trial court’s determination that the total revenue from Xerox’s
        activities in wholesale trade was greater than the total revenue from
        Xerox’s activities in trades other than the wholesale trades.
         The Comptroller Parties assert that because no revenue from Xerox’s sales-
type leases could properly be considered revenue from activities in Division F, the
trial court erred by (1) including the $1,869,848,142 and the $489,770,719
mentioned in conclusions of law 48 as revenue from Xerox’s activities in
wholesale trade for Report Year 2008, and (2) including the $2,135,586,310 and
the $446,790,465 mentioned in conclusion of law 49 as revenue from Xerox’s
activities in wholesale trade for Report Year 2009. As discussed above, we
conclude that the trial court did not err in considering revenue from Xerox’s sales-
type leases as revenue from activities in Division F. Therefore, the trial court did
not err in including these amounts as revenues from Xerox’s activities in wholesale
trade.

         The Comptroller Parties also assert that the trial court erred in including
revenue related to maintenance services as revenues from Xerox’s activities in
wholesale trade. We presume, without deciding that the trial court so erred for
each of the report years. Even under this presumption, the Comptroller Parties have
not shown that the trial court erred in concluding for each report year that the total
revenue from Xerox’s activities in wholesale trade was greater than the total

                                          18
revenue from Xerox’s activities in trades other than the wholesale trades.
Therefore, we overrule the Comptroller Parties’ second issue.

B.    Have the Comptroller Parties shown that the trial evidence conclusively
      proved their entitlement to judgment on their counterclaim?
      In their first issue the Comptroller Parties assert that the cost-of-goods-sold
deduction in Tax Code section 171.1012 does not allow Xerox to deduct costs of
leasing and renting office equipment to its customers—transactions that do not
involve the sale of goods. The Comptroller Parties contend that the trial court erred
in failing to reduce Xerox’s COGS deduction. See Tex. Tax Code Ann. § 171.1012
(West, Westlaw through 2021 R.S.).

      1. Standard of Review
      We review the trial court’s conclusions of law de novo, and its findings of
fact for sufficiency of the evidence. American Multi-Cinema, Inc., 605 S.W.3d at
40. The Comptroller Parties’ first issue deals with their counterclaim, as to which
they had the burden of proof. See Queen v. RBG USA, Inc., 495 S.W.3d 316, 322
(Tex. App.—Houston [14th Dist.] 2016, pet. denied). The trial court found against
the Comptroller Parties on their counterclaim, and the Comptroller Parties have not
argued that the trial evidence is factually insufficient to support any of the trial
court’s findings of fact. Therefore, on appeal the Comptroller Parties must
demonstrate that the trial evidence conclusively established all facts necessary to
support their recovery on the counterclaim. See Dow Chem. Co. v. Francis, 46
S.W.3d 237, 241 (Tex. 2001). When reviewing the legal sufficiency of the
evidence, we consider the evidence in the light most favorable to the challenged
finding and indulge every reasonable inference that would support it. City of Keller
v. Wilson, 168 S.W.3d 802, 823 (Tex. 2005). We must credit favorable evidence if
a reasonable factfinder could and disregard contrary evidence unless a reasonable

                                         19
factfinder could not. See id. at 827. We must determine whether the evidence at
trial would enable reasonable and fair-minded people to find the facts at
issue. See id. The factfinder is the only judge of witness credibility and the weight
to give to testimony. See id. at 819.

      2. Franchise-Tax Liability
      We begin by outlining some general concepts about franchise-tax liability.
Since 1893, Texas has imposed a franchise tax on most domestic and foreign
corporations operating in this State. American Multi-Cinema, Inc., 605 S.W.3d at
38. These taxes “tax . . . the value of th[e] privilege” to transact business in Texas,
which “confers economic benefits, including the opportunity to realize gross
income and the right to invoke the protection of local law.” Id. (quoting In re
Nestle USA, Inc., 387 S.W.3d 610, 612 (Tex. 2012)).

      Determining a taxable entity’s franchise tax liability begins with the entity’s
“‘total revenue,’ a figure derived by adding together select amounts reportable as
gross income on a federal tax return, subtracting bad debts and other items
included on the federal return, and excluding receipts associated with various
transactions.” American Multi-Cinema, Inc., 605 S.W.3d at 38 (quoting Graphic
Packaging Corp. v. Hegar, 538 S.W.3d 89, 93 (Tex. 2017)). In Report Years 2008
and 2009, a taxable entity could subtract from total revenue the greatest of: (1) cost
of goods sold; (2) compensation and benefits paid to officers, directors, owners,
partners, and employees, subject to a cap; or (3) thirty percent of total revenue. Act
of May 2, 2006, 79th Leg., 3d C.S., ch. 1, § 4, sec. 171.101, 2006 Tex. Gen. Laws
1, 8 (codified at Tax Code § 171.101(a)). In practice, the costs a taxable entity
chooses to subtract from total revenue depend on its business: sellers of goods
typically subtract COGS, while service providers generally elect to subtract either
thirty percent of revenues or compensation paid. See Tex. Tax Code Ann. §
                                          20
171.1012; American Multi-Cinema, Inc., 605 S.W.3d at 38. In their counterclaim
the Comptroller Parties alleged that during the Time Period at Issue Xerox
overstated its COGS. The Comptroller Parties alleged that during each report year
Xerox’s COGS deduction should have been much less than the amount reported by
Xerox. The Comptroller Parties argued that for each report year the amount of
Xerox’s COGS was less than thirty percent of its total revenue.5 See Act of May 2,
2006, 2006 Tex. Gen. Laws at 8.

       The provision governing the COGS deduction defines “goods” as “real or
tangible personal property sold in the ordinary course of business of a taxable
entity,” and “tangible personal property” does not include services. Tex. Tax Code
Ann. § 171.1012(a)(1),(3) (West, Westlaw through 2021 R.S.). Generally, the
amount of the COGS deduction includes “all direct costs of acquiring or producing
the goods,” id. § 171.1012(c), plus additional specified costs such as “the costs of
quality control, including replacement of defective components pursuant to
standard warranty policies” id. § 171.1012(d)(9), and limited administrative and
overhead costs, id. § 171.1012(f), but does not include other enumerated costs such
as “distribution costs, including outbound transportation costs,” id. § 171.1012(e);
see Hegar v. Gulf Copper & Manufacturing Corp., 601 S.W.3d 668, 679 (Tex.
2020). A taxable entity may include a cost in its COGS deduction only if the
taxable entity owns the goods it is selling. Id. § 171.1012(i); American Multi-
Cinema, Inc., 605 S.W.3d at 41.

5 Because the complaints under the first issue address only the deduction from total revenue, we
need not address the other components of the formula for calculating franchise-tax liability to
resolve these complaints.
                                              21
      3. The Ordinary Meaning of “sold” as used in Tax Code section
         171.1012(a)(1)
      For the purposes of the COGS deduction, “goods” are defined as “real or
tangible personal property sold in the ordinary course of business of a taxable
entity.” Tex. Tax Code Ann. § 171.1012(a)(1). The Legislature has not provided a
statutory definition of “sold.” The parties do not assert that “sold” has a technical
or particular meaning, and research has not revealed any Texas cases showing that
this term has any such technical or particular meaning. In addition, no different,
more limited, or precise definition of “sold” is apparent from the term’s use in this
statutory context. See $1,760.00 in U.S. Currency, 406 S.W.3d at 180. Therefore,
we construe the term “sold” based on its ordinary meaning. See American Multi-
Cinema, Inc., 605 S.W.3d at 41–42; Hartman, 201 S.W.3d at 672, n. 19.

      The Comptroller Parties assert that for franchise-tax purposes, Xerox’s
sales-type leases may not be considered “sales” and the property subject to these
leases may not be considered “sold” because there is no transfer or passing of title
under these leases. The Comptroller Parties argue that under the ordinary meaning
of “sale,” a sale takes place only when there is a transfer of title to property for a
price. The Comptroller Parties cite the Legislature’s definition of “sale” in article 2
of the Uniform Commercial Code. See Tex. Bus. & Comm. Code Ann. § 2.106(a).
Under this definition, a “sale” consists in the passing of title from the seller to the
buyer for a price. See id. Xerox counters that transfer or passing of title is not
necessary, and that this court should be guided by the statutory definition of “sale”
in the Limited Sales, Excise, and Use Tax Act, in which “sale” is broadly defined
to include the exchange, lease, or rental of tangible personal property. See Tex. Tax
Code Ann. § 151.005(2).

                                          22
      The parties have not cited and research has not revealed a case in which the
court determines the meaning of “sold,” as used in Tax Code section
171.1012(a)(1). The parties have not cited and research has not revealed a Texas
case in which the court determines the ordinary meaning of “selling,” “sold,” or
“sale.” In American Multi-Cinema, Inc., the Supreme Court of Texas held that the
ordinary meaning of “sold” as used in Tax section 171.1012(a)(1) requires a
transfer, but the court did not specifically determine what the ordinary meaning of
“sold” was in the context of that case. See American Multi-Cinema, Inc., 605
S.W.3d at 41–42. Thus, the issue of whether the ordinary meaning of “selling,”
“sold,” or “sale” requires the transfer or passage of title appears to be an issue of
first impression in Texas. The Legislature could have defined “sold” in this context
as requiring the passage of title, as the Legislature did in section 2.106(a) of the
Business and Commerce Code, or the Legislature could have defined “sold” in this
context as not requiring the passage of title, as the Legislature did in the Limited
Sales, Excise, and Use Tax Act. See Tex. Tax Code Ann. § 151.005(2); Tex. Tax
Code Ann. § 151.005(2). The Legislature chose not to provide an express
definition of “sold,” and the definitions from other statutes cited by the parties do
not purport to state the ordinary meaning of “selling,” “sale,” or “sold.” In the
context of this case, the Legislature’s failure to provide a statutory definition of
“sold” requires us to determine whether the ordinary meaning of the term “sold”
requires the transfer or passage of title for property to have been “sold.” See
American Multi-Cinema, Inc., 605 S.W.3d at 41–42; Hartman, 201 S.W.3d at 672,
n. 19. After careful consideration, we conclude that ordinary meaning of “sold” or
“sale” does not require the transfer or passage of title, though it does require the
transfer of the item being sold. See American Multi-Cinema, Inc., 605 S.W.3d at
41–42 (holding that ordinary meaning of “sold” requires a transfer and citing

                                         23
favorably definitions of “sold” that do not require a transfer of title); Sale, The
American Heritage Dictionary of the English Language (5th ed.) (defining “sale”
as “an exchange of goods or services for an amount of money or its equivalent”);
Sale, Black’s Law Dictionary (11th ed. 2019) (defining “sale” as “[t]he transfer of
property or title for a price”) (emphasis added); Transfer, Black’s Law Dictionary
(11th ed. 2019) (defining “transfer” as “[a]ny mode of disposing of or parting with
an asset or an interest in an asset”); see also Medina, 536 S.W.3d at 533 (holding,
in a criminal appeal, that the ordinary meaning of “sale” is “to give or agree to give
something to someone in exchange for money, i.e., transferring property from one
person to another for a price”).6 Therefore, we reject the Comptroller Parties’
argument that Xerox’s sales-type leases may not be considered “sales” and the
property subject to these leases may not be considered “sold” because there is no
transfer or passing of title under these leases.

       The Comptroller Parties also rely on Tax Code section 171.1012(k-1), which
allows three categories of taxable entities to subtract as COGS the costs otherwise
allowed by section 171.1012 “in relation to tangible personal property that the
entity rents or leases in the ordinary course of business.” Tex. Tax Code Ann. §
171.1012(k-1) (West, Westlaw through 2021 R.S.); see Sunstate Equip. Co., LLC.,
601 S.W.3d at 693–94. The Comptroller Parties assert that if the ordinary meaning
of “sales” or “sold” covered all leases, the Legislature would not have needed to
enact subsection (k-1). Though this may be a correct statement, the failure of all
leases to fall within the common meaning of “sales” or “sold” does not preclude
sale-type leases from falling within this common meaning or prevent a court from

6
 The Comptroller Parties cite the Third Court of Appeals’s opinion in Hegar v. Sunstate Equip.
Co., LLC. See 578 S.W.3d 533, 542–43 (Tex. App.—Austin 2017), aff’d, 601 S.W.3d 685 (Tex.
2020). The court in that case did not address the meaning of “selling,” “sold,” or “sale.” See id.
                                               24
considering property leased under a sales-type lease to be “sold” under the
ordinary meaning of sold as used in Tax Code section 171.1012(a)(1). The
Legislature did not state that an entity other than one of the three entities listed in
subsection (k-1) may not make a COGS deduction based on costs relating to
property leased under sales-type leases that fall within the common meaning of
“sold.” See Tex. Tax Code Ann. § 171.1012(k-1). The Legislature did not provide
that the taxable entities mentioned in subsection (k-1) are the only entities that may
subtract as COGS the costs allowed by section 171.1012 in relation to tangible
personal property that the entity rents or leases. See id.

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

      Under the terms of the sales-type leases, unless the lessee exercises its
option to “purchase” the leased equipment, title to the leased equipment always
remains with Xerox, and the lessee must return the equipment to Xerox at the end
of the term. The lessee may not cancel or terminate the lease and is responsible to
pay all payments under the lease for the full term of the lease, which trial evidence
showed was for the useful life of the equipment. Though the lessees have the
option to “purchase” the equipment at the end of the lease term, trial evidence
showed that “[m]ost equipment is returned by lessees at or near the end of the
contracted term” and “[t]he equipment is typically scrapped. I mean, it has no
value the way it is.”

      Courts must base their analysis on the substance, not the form of the
transaction. See Gulf Chemical & Metallurgical Corp., 460 S.W.3d at 749–50 &
n.10. The Supreme Court of Texas has instructed that in the area of tax law, courts
should consider the essence of the transaction, and courts should not disregard the
economic realities underlying the transactions in issue. See Roark Amusement &
Vending, L.P., 422 S.W.3d at 637 & n.14; H.B. Aviation, LLC, 2020 WL 6811993,
                                           25
at *7 (considering the economic realities of the transaction in determining whether
a sale occurred under the use-tax statute). Though the sales-type leases stated that
they were leases and did not state that they were sales, courts give effect to the
substance of the transactions not the form. See Gulf Chemical & Metallurgical
Corp., 460 S.W.3d at 749–50 & n.10. We conclude that property leased under a
sales-type lease may be considered to be “sold” under the ordinary meaning of sold
as used in Tax Code section 171.1012(a)(1).7 See Tex. Tax Code Ann. §
171.1012(a)(1); American Multi-Cinema, Inc., 605 S.W.3d at 41–42 (holding that
ordinary meaning of “sold” requires a transfer and citing favorably definitions of
“sold” that do not require a transfer of title); Roark Amusement & Vending, L.P.,
422 S.W.3d at 637 & n.14; Gulf Chemical & Metallurgical Corp., 460 S.W.3d at
749–50 & n.10.; Sale, The American Heritage Dictionary of the English Language
(5th ed.) (defining “sale” as “an exchange of goods or services for an amount of
money or its equivalent”); Sale, Black’s Law Dictionary (11th ed. 2019) (defining
“sale” as “[t]he transfer of property or title for a price”) (emphasis added).
Therefore, the trial court did not err to the extent it ruled that Xerox properly could
include costs related to sales-type leases in its COGS deduction during the Time
Period at Issue.

7
  Xerox relies upon the Third Court of Appeals’s opinion in Rent-A-Center, Inc. v. Hegar, and
the Comptroller Parties argue that this case is not on point. See 468 S.W.3d at 222–25. The facts
in Rent-A-Center were significantly different from the facts in today’s case, and the Rent-A-
Center case did not involve any issue regarding the COGS deduction. See id. We presume that
the Rent-A-Center case is not on point. The Comptroller Parties also cite the Third Court of
Appeals’s opinion in Hegar v. Sunstate Equip. Co., LLC. See 578 S.W.3d 533, 542–43 (Tex.
App.—Austin 2017), aff’d, 601 S.W.3d 685 (Tex. 2020). The court in that case did not address
any issue regarding sales-type leases under FAS 13 or the scope of the definition of “sold” or
“sale.” See id.
                                               26
      5.     The Comptroller Parties’ argument that Tax Code section 171.1012
             is an exemption.
     The Comptroller Parties assert that we should strictly construe Tax Code
section 171.1012 against Xerox because this statute is tantamount to an exemption.
After the Comptroller Parties filed their brief, the Supreme Court of Texas held
that Tax Code section 171.1012 is not an exemption and should not be strictly
construed against the taxpayer, and we must follow this precedent. See Sunstate
Equip. Co., LLC., 601 S.W.3d at 690. In another part of their brief, the Comptroller
Parties indicate that the COGS deduction is an exemption and that therefore Xerox
had the burden of clearly showing the portion of the costs related to the direct costs
of acquiring or producing goods that Xerox sells. The cases that the Comptroller
Parties cite in support of this proposition are not on point. Tax Code section
171.1012 is not an exemption, and Xerox did not have the burden of proof as to the
Comptroller Parties’ counterclaim. See Sunstate Equip. Co., LLC., 601 S.W.3d at
690; Queen, 495 S.W.3d at 322.

     6.      The Comptroller Parties’ challenges to costs that Xerox included in
             its COGS deduction
      Under their first issue, the Comptroller Parties make numerous specific
challenges to costs that they claim Xerox improperly included in its COGS
deduction for the two report years. The Comptroller Parties assert challenges on
the grounds that (1) some costs are based on leased or rented equipment; (2) some
costs are related to services; (3) some costs are delivery and outbound
transportation costs; and (4) Xerox’s costs related to research and development,
experimental engineering, and design activities did not distinguish between leased
equipment and sold equipment.

                                         27
           Challenges based on leased equipment as to Report Year 2008

       The Comptroller Parties challenge $5,032,896 in “service parts costs related
to the technical service of equipment that is in rental status” on Line 114 of
Defendant’s Exhibit 19.8 Robert Hoyt, one of Xerox’s tax consultants, testified that
these costs “related to equipment that was provided under sales-type leases.” The
Comptroller Parties allege that Xerox improperly included these costs in its COGS
deduction for Report Year 2008 because the costs related to rented equipment.
Based on our conclusions in section II. B. 4. above, it would have been proper for
Xerox to have included costs related to sales-type leases. After examining the trial
evidence under the applicable standard of review, we conclude that the
Comptroller Parties have not shown that they conclusively proved the amount, if
any, of these costs that related to equipment that was provided under leases that
were not sales-type leases. See Dow Chem. Co., 46 S.W.3d at 241; Queen, 495
S.W.3d at 322; Bethel v. Butler Drilling Co., 635 S.W.2d 834, 844 (Tex. App.—
Houston [14th Dist.] 1982, writ ref’d n.r.e.). The Comptroller Parties have not
shown that it would have been improper for Xerox to include these costs in its
COGS deduction for Report Year 2008.

       The Comptroller Parties also challenge $4,619,370 in “[s]ervice parts cost
for equipment leased” on Line 119 of Defendant’s Exhibit 19. We presume,
without deciding, that the Comptroller Parties have shown that they conclusively
proved that these costs were based on equipment provided under leases that were
not sales-type leases and that it would have been improper for Xerox to have
included these costs in its COGS deduction for Report Year 2008.

8Defendant’s Exhibit 19 contains a list of items that Xerox included in the calculation of the
costs that should have been included in its COGS deduction for Report Year 2008.
                                                28
       The Comptroller Parties also challenge the costs listed on the following lines
of Defendant’s Exhibit 19: Line 14, Line 26, Line 37, Line 56, Line 109, Lines
138–41, Lines 169–72, and Lines 194–96. The Comptroller Parties assert that
Xerox improperly included these costs in its COGS deduction for Report Year
2008 because these costs relate to leased equipment. Based on our conclusions in
section II. B. 4. above, it would have been proper for Xerox to have included costs
related to sales-type leases. We presume that some of the costs on each of these
lines related to equipment that was provided under leases that were not sales-type
leases. After examining the trial evidence under the applicable standard of review
as to each of these complaints, we conclude that the Comptroller Parties have not
shown that they conclusively proved the amount of these costs that related to
equipment that was provided under leases that were not sales-type leases. See Dow
Chem. Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at 322; Bethel, 635 S.W.2d at
844.

           Challenges based on leased equipment as to Report Year 2009

       The Comptroller Parties challenge $2,889,737 in costs for “Service parts
costs related to the technical service of equipment that is in rental status” on Line
132 of Defendant’s Exhibit 20.9 The Comptroller Parties allege that Xerox
improperly included these costs in its COGS deduction for Report Year 2009
because Robert Hoyt, one of Xerox’s tax consultants, agreed that these costs are
costs of providing services to equipment that is rented, and therefore that these
costs are not includable. The Comptroller Parties assert that Hoyt voiced this
agreement when he answered the following question at trial:

9Defendant’s Exhibit 20 contains a list of items that Xerox included in the calculation of the
costs that should have been included in its COGS deduction for Report Year 2009.

                                                29
      [Comptroller Parties’ Counsel]: And [Line] 132 is similar to the one
      we talked about last year, but it’s only related to stuff that’s rented.
      Do you agree with me today that that should not have been included
      in the direct line?
      [Hoyt]: Yes. I think that’s probably right.
      Xerox did not stipulate or judicially admit that Xerox improperly included
these costs in its COGS deduction for Report Year 2009. In testifying about the
similar cost item on Line 114 of Defendant’s Exhibit 19, Hoyt testified that these
costs “related to equipment that was provided under sales-type leases.” Based on
our conclusions in section II. B. 4. above, it would have been proper for Xerox to
have included costs related to sales-type leases. After examining the trial evidence
under the applicable standard of review, we conclude that the Comptroller Parties
have not shown that they conclusively proved that it would have been improper for
Xerox to have included the costs on Line 132 of Defendant’s Exhibit 20 in its
COGS deduction for Report Year 2009. See Dow Chem. Co., 46 S.W.3d at 241;
Queen, 495 S.W.3d at 322.

      The Comptroller Parties also challenge $9,520,568 in “[s]ervice parts cost
for equipment leased” on Line 137 of Defendant’s Exhibit 20. We presume,
without deciding, that the Comptroller Parties have shown that they conclusively
proved that these costs were based on equipment provided under leases that were
not sales-type leases and that it would have been improper for Xerox to have
included these costs in its COGS deduction for Report Year 2009.

      The Comptroller Parties also challenge the costs listed on Lines 23, 55, 79,
127, 131, 153–56, 177, 183–87, 215–18, 224, 227, 230, 236, 252, 255–56, 258,
274, and 285 of Defendant’s Exhibit 20. The Comptroller Parties allege that Xerox
improperly included these costs in its COGS deduction for Report Year 2008
because these costs relate to leased equipment. Based on our conclusions in section
                                         30
II. B. 4. above, it would have been proper for Xerox to have included costs related
to sales-type leases. We presume that some of the costs on each of these lines
related to equipment that was provided under leases that were not sales-type leases.
After examining the trial evidence under the applicable standard of review as to
each of these complaints, we conclude that the Comptroller Parties have not shown
that they conclusively proved the amount of these costs that related to equipment
that was provided under leases that were not sales-type leases. See Dow Chem.
Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at 322; Bethel, 635 S.W.2d at 844.

                  Challenges based on costs related to services

      The provision governing the COGS deduction defines “goods” as “real or
tangible personal property sold in the ordinary course of business of a taxable
entity.” Tex. Tax Code Ann. § 171.1012(a)(1).         The definition of “tangible
personal property” specifically excludes “services” from the scope of the
definition. Tex. Tax Code Ann. § 171.1012(a)(3). Generally, the amount of the
COGS deduction includes “all direct costs of acquiring or producing the goods,”
plus additional specified costs such as “the costs of quality control, including
replacement of defective components pursuant to standard warranty policies,
inspection directly allocable to the production of goods, and repairs and
maintenance of goods.” Tex. Tax Code Ann. § 171.1012(c), § 171.1012(d)(9). A
taxable entity may include a cost in its COGS deduction only if the taxable entity
owns the goods it is selling. Tex. Tax Code Ann. § 171.1012(i). Under Comptroller
Rule 3.588, if a transaction contains elements of both a sale of tangible personal
property and a service, a taxable entity may only subtract as cost of goods sold the
costs otherwise allowed by Comptroller Rule 3.588 in relation to the tangible
personal property sold. See 34 Tex. Admin. Code § 3.588(c)(7).

      The Comptroller Parties assert that “repair and maintenance of goods” under
                                        31
Tax section 171.1012(d)(9) includes only “repair and maintenance of goods for
sale” and does not include repair and maintenance of goods after the goods have
been sold. We presume, without deciding, that this is so.
      The Comptroller Parties challenge $4,835,572 in “costs of sales applicable
to service labor billed to non-affiliated customers” on Line 43 of Defendant’s
Exhibit 19. The Comptroller Parties also challenge $2,267,218 in “costs of sales
applicable to service labor billed to non-affiliated customers” on Line 60 of
Defendant’s Exhibit 20. We presume, without deciding, that the Comptroller
Parties have shown that they conclusively proved that (1) it would have been
improper for Xerox to have included the costs on Line 43 of Defendant’s Exhibit
19 in Xerox’s COGS deduction for Report Year 2008, and (2) it would have been
improper for Xerox to have included the costs on Line 60 of Defendant’s Exhibit
20 in Xerox’s COGS deduction for Report Year 2009.

      The Comptroller Parties challenge $17,779,165 in costs on Line 55 of
Defendant’s Exhibit 19 and $14,801,514 in costs on Line 78 of Defendant’s
Exhibit 20. The detailed description for both lines is the same: “Service labor
related to equipment installs and removals accounted for as Equipment Costs of
Sales [and for] service labor incurred during the warranty period.” The
Comptroller Parties allege that Xerox improperly included these costs in its COGS
deduction for Report Year 2008 because the costs related to services provided to
Xerox’s customers. Xerox argues that these costs were service and production
costs for replacement parts under warranty and related to equipment that was held
out for sale by Xerox to its customers. Xerox contends that it properly included
these costs under Tax Code section 171.1012(a)(2), (c)(2), and (d)(9). After
examining the trial evidence under the applicable standard of review, we conclude
that the Comptroller Parties have not shown that they conclusively proved the

                                        32
amount of these costs that were not quality-control costs under Tax Code section
171.1012(d)(9). See Dow Chem. Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at
322; Bethel, 635 S.W.2d at 844. The Comptroller Parties have not shown that it
would have been improper for Xerox to have included these costs in its COGS
deduction.

      The Comptroller Parties challenge $532,864,713 in costs on Line 235 of
Defendant’s Exhibit 19 and $523,557,961 in costs on Line 494 of Defendant’s
Exhibit 20. The detailed description for both lines is the same: “Service labor
expenses for ‘Sold’ equipment.” The Comptroller Parties assert that Xerox
improperly included these costs in its COGS deduction because the costs related to
services provided to Xerox’s customers. Hoyt indicated at trial that “sold
equipment” in this line includes equipment under sales-type leases but does not
include equipment under operating leases or rental agreements. Xerox argues that
these costs were labor costs directly related to the production and acquisition of the
equipment under Tax Code section 171.1012(c) and quality-control costs under
Tax Code section 171.1012(d)(9). After examining the trial evidence under the
applicable standard of review, we conclude that the Comptroller Parties have not
shown that they conclusively proved the amount, if any, of these costs that were
not quality-control costs or direct costs of acquiring or producing goods. See Tex.
Tax Code Ann. § 171.1012(c); Tex. Tax Code Ann. § 171.1012(d)(9); Dow Chem.
Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at 322; Bethel, 635 S.W.2d at 844. The
Comptroller Parties have not shown that it would have been improper for Xerox to
have included these costs in its COGS deduction.

      The Comptroller Parties challenge $15,542,301 in costs for “[s]ervice labor
expenses for Rental equipment” on Line 236 of Defendant’s Exhibit 19. We
presume, without deciding, that the Comptroller Parties have shown that they
                                         33
conclusively proved that they conclusively proved that (1) the costs on Line 236 of
Defendant’s Exhibit 19 were based on services for equipment that was not “sold”
and thus did not fall within the definition of “goods” under Tax Code section
171.1012(a)(1), and (2) it would have been improper for Xerox to have included
these costs in its COGS deduction for Report Year 2008.

      The Comptroller Parties challenge $79,469,630 in costs on Line 309 of
Defendant’s Exhibit 20. The detailed description for both lines is “Labor services
purchased from outside agencies on a contract basis. This account is not to be used
for consulting services.” The Comptroller Parties allege that Xerox improperly
included these costs in its COGS deduction because the costs related to services
provided to Xerox’s customers. Hoyt testified that these costs were for
maintenance and service labor performed by contractors hired by Xerox on
equipment, some of which was sold and some of which was rented. Xerox argues
that these costs were labor costs directly related to the production and acquisition
of the equipment under Tax Code section 171.1012(c). After examining the trial
evidence under the applicable standard of review, we conclude that the
Comptroller Parties have not shown that they conclusively proved the amount, if
any, of these costs that were not quality-control costs or direct costs of acquiring or
producing goods. See Tex. Tax Code Ann. § 171.1012(c); Tex. Tax Code Ann. §
171.1012(d)(9); Dow Chem. Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at 322;
Bethel, 635 S.W.2d at 844. The Comptroller Parties have not shown that it would
have been improper for Xerox to have included these costs in its COGS deduction.

      The Comptroller Parties challenge $25,182,625 in costs for “services
purchased which are not defined in account series 51508001– 8009, e.g., building
of necessary items used in manufacturing on research projects; surveys conducted
by outside agencies” on Line 359 of Defendant’s Exhibit 20. The Comptroller
                                          34
Parties allege that Xerox improperly included these costs in its COGS deduction
because the costs related to services provided to Xerox’s customers. Hoyt testified
that these costs may include research and development costs. Xerox asserted in
Plaintiff’s Exhibit 40 that these costs were included in Xerox’s COGS deduction
under Tax Code section 171.1012(c)(9). See Tex. Tax Code Ann. § 171.1012(c)(9)
(“costs attributable to research, experimental, engineering, and design activities
directly related to the production of the goods, including all research or
experimental expenditures described by Section 174, Internal Revenue Code”). On
appeal, Xerox asserts that it was entitled to deduct these costs under Tax Code
section 171.1012(c) and section 171.1012(d)(9). See Tex. Tax Code Ann. §
171.1012(c); Tex. Tax Code Ann. § 171.1012(d)(9). After examining the trial
evidence under the applicable standard of review, we conclude that the
Comptroller Parties have not shown that they conclusively proved the amount, if
any, of these costs that were not quality-control costs or direct costs of acquiring or
producing goods, or costs attributable to research, experimental, engineering, and
design activities directly related to the production of the goods. See Dow Chem.
Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at 322.

        Challenges to alleged delivery and outbound transportation costs

      The cost of goods sold under Tax Code section 171.1012 does not include
distribution costs, including outbound transportation costs, in relation to the
taxable entity’s goods. See Tex. Tax Code Ann. § 171.1012(e)(3) (West, Westlaw
through 2021 R.S.); Hegar v. Sunstate Equip. Co., LLC, 578 S.W.3d 533, 540
(Tex. App.—Austin 2017), aff’d, 601 S.W.3d 685 (Tex. 2020). The Comptroller
Parties challenge $128,218,732 in costs on Line 121 of Defendant’s Exhibit 19.
The description of this item in Defendant’s Exhibit 19 and in Plaintiff’s Exhibit 39

                                          35
is the same: “METERED CONSUMABLES COST.”10 In each exhibit there
appears to be the beginning of an additional letter at the end of the description that
is cut off. The detailed description of this item is “Cost from shipments of
consumables to metered customers.” Hoyt testified at trial that the account
description was “Metered Consumables Cost of” and was cut off. Hoyt testified
that he did not think there was anything in the account description that indicated
that it was a cost of shipping. Looking at the detailed description, Hoyt admitted
that there was “some unclarity as it is as to whether this is a cost of shipping or the
cost of the consumables shipped.”

          The Comptroller Parties also challenge $130,693,407 in costs on Line 139 of
Defendant’s Exhibit 20. The description of this item in Defendant’s Exhibit 20 and
in Plaintiff’s Exhibit 40 is the same: “METERED CONSUMABLES COST OF
S[sic].” The detailed description of this item is “Cost from shipments of
consumables to metered customers.” Hoyt testified at trial that he thinks Line 139
might be the cost of the consumables themselves and not of the shipments of the
consumables. The Comptroller Parties allege that Xerox improperly included these
costs in its COGS deduction because the costs relate to delivery or outbound
transportation costs. After examining the trial evidence under the applicable
standard of review, we conclude that the Comptroller Parties have not shown that
they conclusively proved that any of the costs in Line 121 or Line 139 were
distribution costs or outbound transportation costs. See Tex. Tax Code Ann. §
171.1012(e)(2); Dow Chem. Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at 322;
Bethel, 635 S.W.2d at 844. The Comptroller Parties have not shown that it would
have been improper for Xerox to have included these costs in its COGS deduction.

10   Hoyt testified that Plaintiff’s Exhibit 39 is the “complete version of Defendants’ Exhibit 19.”
                                                   36
      The Comptroller Parties challenge $6,701,354 in costs on Line 160 of
Defendant’s Exhibit 19 and $5,345,422 in costs on Line 67 of Defendant’s Exhibit
20. The detailed description for both lines is the same: “the cost of expendable
miscellaneous packaging and shipping supplies such as tapes, staples, decals, glue,
etc.” The Comptroller Parties assert that Xerox improperly included these costs in
its COGS deduction because the costs relate to delivery or outbound transportation
costs. At trial, Hoyt disagreed that these costs were outbound transportation costs.
Hoyt stated that he viewed these costs as handling costs allowed under Tax Code
section 171.1012(c)(4). See Tex. Tax Code Ann. § 171.1012(c)(4) (West, Westlaw
through 2021 R.S.) (stating that “[t]he cost of goods sold includes all direct costs
of acquiring or producing the goods, including . . . handling costs, including costs
attributable to processing, assembling, repackaging”). After examining the trial
evidence under the applicable standard of review, we conclude that the
Comptroller Parties have not shown that they conclusively proved that any of the
costs in Line 160 or Line 67 were distribution costs or outbound transportation
costs. See Tex. Tax Code Ann. § 171.1012(e)(2); Dow Chem. Co., 46 S.W.3d at
241; Queen, 495 S.W.3d at 322; Bethel, 635 S.W.2d at 844. The Comptroller
Parties have not shown that it would have been improper for Xerox to have
included these costs in its COGS deduction.

                  Challenges to research and development costs
      The cost of goods sold under Tax Code section 171.1012 includes all direct
costs of acquiring or producing the goods, including “costs attributable to research,
experimental, engineering, and design activities directly related to the production
of the goods, including all research or experimental expenditures described
by Section 174, Internal Revenue Code.” See Tex. Tax Code Ann. §
171.1012(c)(9). The Comptroller Parties challenge $48,505,173 in costs on Line 24

                                         37
of Defendant’s Exhibit 19 and $42,989,083 in costs on Line 21 of Defendant’s
Exhibit 20. The detailed description for both lines is the same: “R&D related
material expenditures.” The Comptroller Parties complain that these costs relate to
equipment that is leased as well as equipment that is sold. The Comptroller Parties
suggest that the costs attributable to research, experimental, engineering, and
design activities directly related to the production of equipment that is leased
should not have been included in Xerox’s COGS deduction. Hoyt testified at trial
that all of these costs should be included in Xerox’s COGS deduction. Hoyt
testified that research and development costs are not variable per-unit costs.
According to Hoyt, research and development costs are incurred upfront, and often
prior to any production, and a company incurs these costs to determine whether a
product is feasible, whether the product works, whether it can be produced
effectively, and the best model for the product.

      Hoyt testified that without research-and-development costs, a company is
not going to have any products produced that are either sold or provided under
sales-type leases. Hoyt stated that all of these research-and-development costs were
related to the items that Xerox sold and that the fact that these costs may also be
related to items that were leased does not make them any less directly related to the
products that Xerox sold. According to Hoyt, all of the research and development
leads to the production of all of the products, including those that were sold. In
finding of fact 43, the trial court found that trial testimony established that
research-and-development costs “are not bifurcated by the type of distribution
agreement that is used by the customer to acquire equipment.” In the finding, the
trial court also found that all research-and-development costs “related to a piece of
equipment which [sic] were required to create that equipment.” The Comptroller
Parties have not asserted or shown that the trial evidence is legally or factually

                                         38
insufficient to support finding of fact 43. After examining the trial evidence under
the applicable standard of review, we conclude that the Comptroller Parties have
not shown that they conclusively proved that any of these costs were not costs
attributable to research, experimental, engineering, and design activities directly
related to the production of Xerox’s goods. See Tex. Tax Code Ann. §
171.1012(c)(9); Dow Chem. Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at 322;
Bethel, 635 S.W.2d at 844. The Comptroller Parties have not shown that it would
have been improper for Xerox to have included these costs in its COGS deduction.

      7.    The Comptroller Parties’ failure to show that they conclusively
            proved they were entitled to recover on their counterclaim
      For Report Year 2008, Xerox originally reported a total COGS deduction of
$4,910,835,415. During the litigation in the trial court below, Xerox reviewed its
COGS deduction calculation and determined that its total COGS deduction for
Report Year 2008 should have been $5,994,240,999. In their counterclaim, the
Comptroller Parties alleged that Xerox’s total COGS deduction for Report Year
2008 should have been much less than $4,910,835,415. The Comptroller Parties
argued that Xerox’s COGS was less than thirty percent of its total revenue of
$10,040,814,565, which would be $3,012,244,369.50. The Comptroller Parties had
the burden of proving their entitlement to relief on their counterclaim. See Queen,
495 S.W.3d at 322. The trial court found against the Comptroller Parties on their
counterclaim, and therefore on appeal they must demonstrate that the trial evidence
conclusively established their entitlement to recovery on their counterclaim.
See Dow Chem. Co., 46 S.W.3d at 241. As to Report Year 2008, we have
presumed the Comptroller Parties’ complaints have merit as to the following three
items: (1) $4,619,370 in costs from Line 119 of Defendant’s Exhibit 19, (2)
$4,835,572 in costs from Line 43 of Defendant’s Exhibit 19, and (3) $15,542,301

                                        39
in costs from Line 236 of Defendant’s Exhibit 19. The sum of these three lines is
$24,997,243. We have concluded that all of the Comptroller Parties’ other
complaints as to Report Year 2008 lack merit. Even presuming for the sake of
argument that the Comptroller Parties’ complaints as to these costs totaling
approximately $25 million have merit, the Comptroller Parties have not shown that
the trial evidence conclusively proves that Xerox’s total COGS deduction for
Report Year 2008 should have been less than $4,910,835,415. See Dow Chem.
Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at 322; Bethel, 635 S.W.2d at 844.

      For Report Year 2009, Xerox originally reported a total COGS deduction of
$4,995,383,684. During the litigation in the trial court below, Xerox reviewed its
COGS deduction calculation and determined that its total COGS deduction for
Report Year 2009 should have been $6,647,888,992. In their counterclaim, the
Comptroller Parties alleged that Xerox’s total COGS deduction for Report Year
2009 should have been much less. The Comptroller Parties argued that Xerox’s
COGS was less than thirty percent of its total revenue of $10,671,394,110, which
would be $3,201,418,233. As to Report Year 2009, we have presumed the
Comptroller Parties’ complaints have merit as to the following two items: (1)
$9,520,568 in costs from Line 137 of Defendant’s Exhibit 20, and (2) $2,267,218
in costs from Line 60 of Defendant’s Exhibit 20. The sum of these two lines is
$11,787,786. We have concluded that all of the Comptroller Parties’ other
complaints as to Report Year 2009 lack merit. Even presuming for the sake of
argument that the Comptroller Parties’ complaints as to these costs totaling
approximately $12 million have merit, the Comptroller Parties have not shown that
the trial evidence conclusively proves that Xerox’s total COGS deduction for
Report Year 2009 should have been less than $4,995,383,684. See Dow Chem.
Co., 46 S.W.3d at 241; Queen, 495 S.W.3d at 322; Bethel, 635 S.W.2d at 844.
                                       40
      The Comptroller Parties have not shown that the trial evidence conclusively
proved their entitlement to recover on their counterclaim. We overrule the
Comptroller Parties’ first issue.

                                    III.   CONCLUSION

      The Comptroller Parties have not shown that the trial court erred in
concluding for each report year that the total revenue from Xerox’s activities in
wholesale trade was greater than the total revenue from Xerox’s activities in trades
other than the wholesale trades. The Comptroller Parties have not shown that the
trial court erred in determining that the applicable franchise tax rate for Xerox
during the Time Period at Issue was 0.5% rather than 1.0%. The Comptroller
Parties have not shown that the trial court erred in rendering a take-nothing
judgment as to their counterclaim. Accordingly, we affirm the trial court’s
judgment.

                                           /s/    Randy Wilson
                                                  Justice

Panel consists of Justices Zimmerer, Poissant, and Wilson.

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