Court Opinion

ID: 4522638
Source: CourtListenerOpinion
Date Created: 2020-04-06 07:11:24.507177+00
Date Added: 2024-06-11T09:25:27.619794
License: Public Domain

IN THE SUPREME COURT OF TEXAS
                                         ══════════
                                           No. 17-0464
                                         ══════════

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

                                                 V.

                      AMERICAN MULTI-CINEMA, INC., RESPONDENT
            ══════════════════════════════════════════
                        ON PETITION FOR REVIEW FROM THE
                 COURT OF APPEALS FOR THE THIRD DISTRICT OF TEXAS
            ══════════════════════════════════════════

                                     Argued October 9, 2019

       JUSTICE BUSBY delivered the opinion of the Court.

       The issue in this franchise tax case is whether a movie theater may subtract film exhibition

costs as cost of goods sold when calculating its taxable margin. See TEX. TAX CODE § 171.1012.

As relevant here, a taxable entity may subtract its costs when: (1) the costs relate to “goods,” which

are (a) real or tangible personal property (b) “sold” in the ordinary course of the taxable entity’s

business; and (2) the taxable entity “owns” the goods. Id.

       Following a bench trial, the trial court concluded that Tax Code section 171.1012 permitted

the movie theater to subtract exhibition costs as cost of goods sold because the theater “produces

goods for sale in [the] ordinary course of business” by exhibiting films to paying customers. The

court of appeals affirmed, holding that film exhibitions qualify as tangible personal property under
the “film” prong of the statutory definition. 580 S.W.3d 663, 671 (Tex. App.—Austin 2017).

Neither court separately addressed the requirements that tangible personal property be owned and

sold, though the parties argued those issues. Because we conclude film exhibitions are not tangible

personal property that is sold, we hold the theater was not entitled to include exhibition-related

costs in its cost of goods sold. We therefore reverse and render judgment in the Comptroller’s

favor.

                                          BACKGROUND

          Since 1893, Texas has imposed a franchise tax on most domestic and foreign corporations

operating in this State. In re Nestle USA, Inc., 387 S.W.3d 610, 612 (Tex. 2012). 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. at 622 (quoting Bullock v. Nat’l Bancshares Corp., 584 S.W.2d 268, 270 (Tex.

1979)).

          Determining a taxable entity’s franchise tax liability starts 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.” Graphic Packaging Corp. v. Hegar, 538
S.W.3d 89, 93 (Tex. 2017) (citing TAX CODE §§ 171.101(a), .1011). In tax years 2008 and 2009,

a taxable entity could subtract from total revenue the greatest of: (1) cost of goods sold (COGS);

(2) compensation and benefits paid to officers, directors, owners, partners, and employees, subject

                                                 2
to a cap; 1 or (3) thirty percent of total revenue. 2 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 TAX CODE § 171.1012; Cynthia M. Ohlenforst, The New

Texas Margin Tax: More Than a Marginal Change to Texas Taxation, 60 TAX LAW. 959, 971

(2007).

          This case involves a disagreement between American Multi-Cinema (AMC)—a movie

theater chain—and the Texas Comptroller regarding AMC’s election to use COGS in calculating

its franchise tax liability for 2008 and 2009. AMC’s calculation included costs it incurred in

exhibiting films, including film acquisition costs and costs associated with the theater auditoriums

themselves. AMC subtracted COGS totaling $1,657,313,911 in 2008 and $1,670,197,268 in 2009.

          Following an audit, the Comptroller disallowed AMC’s subtraction of exhibition costs and

requested additional franchise taxes totaling $750,743.46 for 2008 and $699,405.07 for 2009.

AMC paid under protest and sued to recover the disputed amount, arguing its exhibition costs were

properly subtracted as COGS.

          The trial court conducted a bifurcated bench trial, considering (1) whether AMC’s film

exhibitions were “tangible personal property” and thus “goods” under section 171.1012; and (2) if

so, the amount AMC was entitled to receive as a refund. AMC prevailed in phase one, and the

Comptroller prevailed in phase two.

          1
              TAX CODE § 171.1013.
          2
           In 2013, the Legislature added $1 million as a fourth option. See Act of May 27, 2013, 83d Leg., R.S., ch.
1232, § 6, 2013 Tex. Gen. Laws 3104, 3106.

                                                         3
       During phase one, the parties disputed how AMC’s “product” should be characterized. To

better explain its business, AMC presented evidence that a customer who purchases a ticket from

AMC acquires a revocable license to watch a specific presentation at a specific time. Purchasing

a ticket does not grant a customer any right to the film itself, and AMC prohibits recording of the

presentations.

       AMC explained the process by which its staff acquired, assembled, improved, and

exhibited films in 2008 and 2009. Its witness testified that AMC licensed first-run motion pictures

from distributors like Paramount, Sony, Universal, and Disney, receiving the right to show a film

to customers and agreeing to pay the distributors a percentage of AMC’s revenue. These

distributors delivered films to AMC in four to six small film reels, which AMC spliced together

before showtime and returned at the film’s box-office conclusion. To the front of the films, AMC

added trailers, advertisements, and public service announcements, though the company could not

cut, alter, or interrupt the film itself. Finally, AMC offered evidence that it improved each

presentation individually by adding tailored “cues” to control auditorium lighting and screen

curtains, ultimately creating a “unique audio and visual experience.”

       AMC does not view its product as complete, however, without carefully designed

auditoriums facilitating AMC customers’ “premium motion picture . . . experience.” AMC’s

witness testified that AMC’s product is the sights and sounds produced in the theater through the

screen and speakers that embody the film. To ensure these sights and sounds are of optimum

quality, AMC strives to meet visual and acoustical integrity guidelines set by industry groups and

technology providers. AMC considers the “projectors, speakers, amplifiers, screens, lighting,

surface materials and shapes, and even cubic volume of air” in each auditorium so that each

                                                4
auditorium functions as an “acoustic chamber”: speakers are positioned for optimum sound

quality, and seats are arranged to provide every customer a clear line of sight.

         When phase one of the trial concluded, the trial court signed findings of fact and

conclusions of law. The court concluded that AMC’s film exhibitions were tangible personal

property and thus “goods for sale in the ordinary course of [AMC’s] business under Section

171.1012.” Therefore, AMC had properly subtracted its exhibition costs.

         As relevant here, section 171.1012 defines “tangible personal property” as (i) personal

property that is “perceptible to the senses,” and (ii) films and similar creative content embodied in

a medium that “is intended or is reasonably likely” to be mass-distributed.                              TAX CODE

§ 171.1012(a)(3)(A). In its legal conclusion, the trial court did not mention either of these two

prongs of the section 171.1012(a)(3)(A) definition. But the court’s sole finding of fact regarding

AMC’s film exhibitions quoted subsection (a)(3)(A)(i)—the perceptibility prong—word-for-

word. 3 The court declined to adopt either party’s proposed findings regarding the film prong—

subsection (a)(3)(A)(ii).

         In phase two of the trial, the court considered how much of AMC’s rent, real estate taxes,

utilities, and building depreciation could be subtracted as “exhibition costs.” AMC sought to

subtract costs relating to all auditorium square footage. The Comptroller disagreed, arguing only

costs associated with auditorium space occupied by speakers and screens qualified. The court

ordered the Comptroller to return $258,417 to AMC for 2008 and $289,815 for 2009, plus statutory

interest.

         3
          The finding of fact stated: “When AMC exhibits movies and other content to its paying customers, it
produces personal property that can be seen, weighed, felt, or touched or that is perceptible to the senses in any other
manner for sale in its ordinary course of business.”

                                                           5
       Both parties appealed, and the court of appeals affirmed in part and reversed and rendered

in part. No. 03-14-00397-CV, 2015 WL 1967877 (Tex. App.—Austin 2015), withdrawn and

superseded on overruling of reh’g, 580 S.W.3d 663 (Tex. App.—Austin 2017). Regarding

whether film exhibition involves the sale of “goods,” the court of appeals affirmed, initially

holding that AMC sold tangible personal property under the statute’s perceptibility prong—

subsection (a)(3)(A)(i). 2015 WL 1967877, at *6. The court later issued a substitute opinion on

rehearing, however, holding instead that exhibiting films qualified as a sale of goods under the

film prong—subsection (a)(3)(A)(ii)—and declining to address perceptibility. 580 S.W.3d at 669–

71. The court of appeals cited subsection (t), which was added by the Legislature in 2013 to

address movie theater costs, as persuasive authority favoring AMC’s arguments. Id. at 671.

       Concerning the refund measure, the court of appeals reversed, awarding AMC the entire

disputed amount, including costs relating to the auditoriums’ total square footage. Id. at 675. The

Comptroller has not sought review of this portion of the court of appeals’ decision.

                                             ANALYSIS

       In a single issue, the Comptroller asks us to reverse the court of appeals’ judgment and

hold that in 2008 and 2009, section 171.1012 did not permit AMC to subtract its exhibition costs

as COGS. He argues that reversal is required for two reasons: (1) costs of film exhibition do not

qualify as COGS under section 171.1012 because AMC is not selling tangible personal property

when it shows films to customers, and (2) the court of appeals erred by considering the 2013

amendment adding subsection (t).

       AMC responds that we should affirm the court of appeals’ judgment because (1) its

business is the distribution of films’ creative content to customers, so its costs of film exhibition

                                                 6
qualify as COGS under the film prong and subsection (o); and (2) the court of appeals properly

considered the 2013 addition of subsection (t) as a “clarification” of existing law.

       We now reverse and hold that AMC was not entitled to subtract its film exhibition costs as

COGS because exhibitions are not tangible personal property that is sold. See TAX CODE

§ 171.1012(a)(1).

I.     Standard of review

       We review the trial court’s conclusions of law de novo, State v. Heal, 917 S.W.2d 6, 9

(Tex. 1996), and its findings of fact for sufficiency of the evidence. Anderson v. City of Seven

Points, 806 S.W.2d 791, 794 (Tex. 1991). We review matters of statutory construction as

questions of law with the goal of determining and giving effect to the Legislature’s intent. TEX.

GOV’T CODE § 312.005; Colorado County v. Staff, 510 S.W.3d 435, 444 (Tex. 2017); City of San

Antonio v. City of Boerne, 111 S.W.3d 22, 25 (Tex. 2003). In doing so, we look first and foremost

to the plain and common meaning of the statute’s words and to the definitions it provides, “unless

a different meaning is apparent from the context.” Colorado County, 510 S.W.3d at 444 (citing

Molinet v. Kimbrell, 356 S.W.3d 407, 411 (Tex. 2011)). When the words read in context are clear,

they determine intent; a court must never rewrite them under the guise of interpretation. Id. Only

when there is more than one reasonable interpretation of the statutory text, or when its plain

meaning leads to absurd or nonsensical results, may we look beyond that language for assistance

in determining intent. Id.

II.    Applicable law

       Section 171.1012 of the Tax Code addresses how to determine a taxable entity’s cost of

goods sold. A taxable entity electing to compute its taxable margin by subtracting COGS may

                                                 7
include “all direct costs of acquiring or producing the goods,” including costs of labor, certain

materials, handling, storage, depreciation, rent, repairs and maintenance, research and

development, and acquisition and production taxes. TAX CODE § 171.1012(c). A taxable entity

may also subtract certain indirect costs and up to four percent of its goods-related overhead.
Id. § 171.1012(d), (f). Certain other costs are expressly excluded from COGS. Id. § 171.1012(e).

       Eligibility for COGS is not automatic. Rather, as relevant here, a cost may be included in

COGS when: (1) the cost relates to “goods,” meaning (a) real or tangible personal property that is

(b) “sold” in the ordinary course of the taxable entity’s business (subsection (a)(1)); and (2) the

taxable entity “owns” the goods it is selling (subsection (i)). Id. § 171.1012. Although the parties

dispute both of these requirements, we need only address the first.

III.   AMC was not entitled to subtract its exhibition costs as COGS because film
       exhibitions are not tangible personal property that is sold as required by section
       171.1012(a)(1).

       Subsection (a)(1) provides that goods must be “sold in the ordinary course of business of

a taxable entity” before their related costs may be subtracted as COGS. Id. § 171.1012(a)(1).

Because the Tax Code does not define “sold,” we begin by determining its meaning.

       A.      “Sold” as used in subsection (a)(1) means “transferred.”

       When a statute contains an undefined term, we typically give the term its ordinary meaning.

Sw. Royalties, Inc. v. Hegar, 500 S.W.3d 400, 405 (Tex. 2016). “If the statute is clear and

unambiguous, we must apply its words according to their common meaning.” R.R. Comm’n of

Tex. v. Tex. Citizens for a Safe Future & Clean Water, 336 S.W.3d 619, 628 (Tex. 2011). “But

we will not give an undefined statutory term a meaning that is out of harmony or inconsistent with

other provisions in the statute.” In re Hall, 286 S.W.3d 925, 928–29 (Tex. 2009). “[I]f a different,

                                                 8
more limited, or precise definition is apparent from the term’s use in the context of the statute, we

apply that meaning.” State v. $1,760.00 in U.S. Currency, 406 S.W.3d 177, 180 (Tex. 2013) (per

curiam).

         The parties disagree regarding which circumstance is present here. The Comptroller argues

we should apply the ordinary meaning of the term “sold,” which requires some transfer of property

or title, or an exchange for value. AMC contends, however, that subsection (o) deems tangible

personal property under the statute’s film prong sold by its mere distribution. It also asserts that

subsection (t)—as a later “clarification” of subsection (o)—permits AMC to subtract its exhibition

costs as COGS for years 2008 and 2009. Because we conclude that subsections (o) and (t) are

inapplicable to this case, we hold that the term sold in subsection (a)(1) assumes its ordinary

meaning and thus requires a transfer.

         The Comptroller’s proposed ordinary meaning of sold is consistent with Texas cases and

dictionary definitions. Texas courts have long recognized that a sale requires a transfer: “[t]o

constitute a sale of property, the title to, or property in, the thing, must pass from the seller to the

buyer.” Cobb v. Tufts, 2 Willson 141, 141 (Tex. Ct. App. 1888). Indeed, every sale must transfer

property, and where no transfer occurs, nothing is sold. L.H. Woods & Co. v. Half, Weiss & Co.,

44 Tex. 633, 635 (1876). 4 Similarly, Black’s Law Dictionary defines “sale” as “[t]he transfer of

property or title for a price.” Sale, BLACK’S LAW DICTIONARY (11th ed. 2019). A ”transfer” is

“[a]ny mode of disposing of or parting with an asset or an interest in an asset.” Transfer, BLACK’S

LAW DICTIONARY (11th ed. 2019).

         4
           The current Texas Business and Commerce Code, governing many of the same entities subject to the
franchise tax, similarly provides that “[a] ‘sale’ consists in the passing of title from the seller to the buyer for a price.”
TEX. BUS. & COM. CODE § 2.106(a).

                                                              9
        Contrary to AMC’s assertions, subsection (o) does not override the “sold” requirement

because AMC has not shown that (o) applies here. Subsection (o) applies only to taxable entities

“whose principal business activity is film . . . production or . . . the distribution of tangible personal

property described by [the film prong], or any combination of these activities.” TAX CODE

§ 171.1012(o). 5 AMC claims that its “production and exhibition process” meets the requirements

of subsection (o) because its “principal business is the production and distribution of a film’s

creative content.” The Comptroller disagrees. In his view, AMC cannot rely on subsection (o)

because AMC’s principal business—as understood in the film industry—is exhibition, an activity

not within (o)’s scope.

        In the trial court, the parties extensively addressed whether AMC’s principal business

activity is production, distribution, neither, or a combination of both. See id. Distribution is not

defined in the Tax Code, while production is defined very generally as “construction, manufacture,

development, mining, extraction, improvement, creation, raising, or growth.” Id.

§ 171.1012(a)(2). AMC favored applying this definition of production and argued distribution

should be given its ordinary meaning: “to deliver.” AMC produces film property, it argued, by

improving and assembling film reels, and it distributes film property by delivering it to customers

        5
            Subsection (o) provides:
        If a taxable entity . . . whose principal business activity is film or television production or
        broadcasting or the distribution of tangible personal property described by Subsection (a)(3)(A)(ii),
        or any combination of these activities, elects to subtract cost of goods sold, the cost of goods sold
        for the taxable entity shall be the costs described in this section in relation to the property and include
        depreciation, amortization, and other expenses directly related to the acquisition, production, or use
        of the property, including expenses for the right to broadcast or use the property.
TAX CODE § 171.1012(o).

                                                           10
via its speakers and screens. The Comptroller urged the court to interpret both terms within

subsection (o) more precisely, in accordance with their meanings in the film industry.

         At trial, the Comptroller’s expert provided testimony on the meanings of production and

distribution in the film industry. Regarding production, he testified: “Film production is creating

the movie. It’s akin to manufacturing the movie” and generally involves engaging actors, drafting

scripts or outlines, securing financing and locations, and contracting with various suppliers.

Regarding distribution, he explained: “In the film business distribution has a particular meaning,”

involving handling delivery of the films, financing the production of the films, and “tak[ing] care

of all the press and the publicity” for the films.

         Distributors include entities like Disney, Lionsgate, and Columbia Pictures, while theaters

like AMC are called “exhibitors.” Exhibitors manage theater venues, “provid[ing] a communal

experience and a service allowing people who want to see a movie in a theater” to do so “by

projecting [the film] on the screen.” Given this testimony, the Comptroller argued, subsection (o)

excludes AMC because its principal business activity is not production or distribution as those

terms are understood in the film industry. The term exhibitor more aptly applies.

         Although the trial court heard substantial testimony and argument regarding subsection

(o)’s application to this case, its findings of fact and conclusions of law made no mention of that

subsection or of a principal business activity of production or distribution. 6 Nor did the court of

         6
           We take this opportunity to emphasize how important thorough findings of fact and conclusions of law are
to reaching a correct decision in a bench trial and facilitating efficient appellate review, particularly in a technical
statutory area of law such as taxation. In a jury trial, the charge reveals the court’s resolution of many legal questions
regarding the applicable standards and definitions, and it identifies the factual disputes to be settled by the jury. No
such document exists following a bench trial unless the trial court signs factual findings and legal conclusions covering
the salient issues. In this case, issues unaddressed by the trial court’s brief findings and conclusions include what
disputed statutory terms mean, which specific parts of the statute apply and why, and what (if any) factual disputes
were resolved in deciding that they apply. Indeed, the court adopted neither side’s proposed findings or conclusions

                                                           11
appeals address the matter. AMC’s scant briefing on subsection (o) does not acknowledge this

lack of a decision by the courts below or ask us to affirm on this alternative ground. Cf. TEX. R.

APP. P. 53.4; Padilla v. LaFrance, 907 S.W.2d 454, 464 n.6 (Tex. 1995).

         Even construing AMC’s brief liberally as including such a request, we conclude AMC

cannot rely on subsection (o) because “more precise definition[s]” of production and distribution

that do not cover AMC’s principal business activities are “apparent from the term[s’] use in the

context of the statute.” Greater Hous. P’ship v. Paxton, 468 S.W.3d 51, 58 (Tex. 2015). The

statutory text shows the Legislature intended subsection (o) to cover the media industry. See TAX

CODE § 171.1012(o) (referring to film, television, broadcasting, and tangible personal property

under the “film” prong). The prominent roles “production” and “distribution” play in this media-

centric provision—and their use in conjunction with “broadcasting”—support the adoption of

precise meanings for those terms. Greater Hous. P’ship, 468 S.W.3d at 59 (“The statute’s first

contextual clue emerges from the words immediately surrounding [the word in question].”); see

also TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 441 (Tex. 2011) (“[S]imilar terms

[must] be interpreted in a similar manner.”).

         Subsection (a)(2)’s general definition of production is not to the contrary. Production is

used frequently throughout section 171.1012 to describe costs of various production activities;

however, subsection (o) uses the term to describe entities’ activities in the media business.

Compare TAX CODE § 171.1012(c)(3) (including “cost of materials that are consumed in the

on many issues, thereby complicating the appellate process for all parties (who would, for example, need to raise
cross-issues on unaddressed alternative grounds and show they proved as a matter of law any refused factual findings
necessary to their case). Given this lack of clarity, it is perhaps not surprising that the court of appeals issued two
different opinions attempting to decide which (if any) prong of the definition of tangible personal property applied,
and this Court is resolving the case on a foundational issue that neither court below separately addressed.

                                                         12
ordinary course of performing production activities”) (emphasis added), with id. § 171.1012(o) (“a

taxable entity . . . whose principal business activity is film or television production”). This

difference in context indicates that production as used in (o) has a more precise meaning than

(a)(2)’s definition. 7

        Finally, subsection (o)’s surrounding provisions also support a more precise interpretation,

as many are tailored to cover particular institutions or activities. See id. §§ 171.1012(k) (lending

institutions), .1012(k-1) (heavy construction equipment rental or leasing companies), .1012(k-2)

(pipeline entities).

        Applying the more precise meanings of production and distribution within subsection (o)

to the undisputed evidence regarding the nature of AMC’s business (summarized above), 8 we hold

as a matter of law that AMC’s principal business activity is not production or distribution as

understood in the film industry. Thus, subsection (o) does not apply.

        Subsection (t)—adopted five years after the tax years in question and not applicable

retroactively—likewise does not affect our interpretation of sold. That subsection expressly allows

movie theaters to subtract exhibition costs as COGS:

        If a taxable entity that is a movie theater elects to subtract cost of goods sold, the
        cost of goods sold for the taxable entity shall be the costs described by this section
        in relation to the acquisition, production, exhibition, or use of a film or motion
        picture, including expenses for the right to use the film or motion picture.

        7
          See In re Office of the Attorney General of Texas, 456 S.W.3d 153, 155–56 (Tex. 2015) (per curiam) (“The
meaning of words read in isolation is frequently contrary to the meaning of words read contextually in light of what
surrounds them . . . . The import of language, plain or not, must be drawn from the surrounding context, particularly
when construing everyday words and phrases that are inordinately context-sensitive.”).
        8
            Although the parties dispute whether AMC’s business meets the legal definitions of production or
distribution, they do not dispute factually what its business entails.

                                                        13
Id. § 171.1012(t).   The court of appeals concluded that disallowing subtraction of AMC’s

exhibition costs here would be “at odds with” this provision, 580 S.W.3d at 671, which the

amending act characterized as “a clarification of existing law.” Act of May 27, 2013, 83d Leg.,

R.S., ch. 1232, § 10(b), 2013 Tex. Gen. Laws 3104, 3108.

       The Comptroller argues the court of appeals erred in treating subsection (t) as controlling

because it allowed a later Legislature to construe an earlier Legislature’s enactment. AMC

disagrees, asserting that courts interpreting statutes should consider amendments, especially

clarifying ones that do not change prior law. According to AMC, the court of appeals properly

considered subsection (t) as a clarification of subsection (o)’s existing scope.

       Our starting point in resolving this dispute must be the language of the original and

amended statutes. Even if the Legislature amends a statute “to clarify what it believe[s] to be

existing law, we cannot attribute the intent of [the amending] Legislature to that of [an earlier]

Legislature, which initially promulgated [the statute].” In re C.O.S., 988 S.W.2d 760, 764 (Tex.

1999). Rather, “[w]e are constrained to construe the statute as it existed” in the tax years at issue.
Id.

       Section 171.1012 begins by stating general rules for determining cost of goods sold. In

later subsections, such as (o) and (t), the Legislature alters those rules in certain respects. Some

subsections modify the types of costs an entity may subtract as COGS, while others modify the

types of entities entitled to subtract those costs. In Sunstate Equipment Co., LLC v. Hegar, also

issued today, we explain that subsection (k-1) modifies only the entities entitled to the COGS

subtraction while leaving the subtractable costs unchanged. __ S.W.3d __, __ (Tex. 2020).

                                                 14
         Applying this understanding of the statutory scheme, we conclude subsection (t) arguably

clarifies the law on subtractable costs, but it also changes the law on which entities may make

those subtractions—the very point critical to AMC’s case. Specifically, although subsection (t)

adds exhibition costs to subsection (o)’s list of subtractable costs, these costs were arguably already

included as costs of acquisition and use under subsection (o). 9 In this sense, we agree that (t) is a

clarification of (o)’s permitted costs.

         But subsection (t) also goes a step further by changing the types of entities entitled to this

subtraction. Subsection (t) allows a “movie theater” to subtract exhibition costs without satisfying

subsection (o)’s requirement that its “principal business activity” be film production

or distribution. Compare TAX CODE § 171.1012(t), with id. § 171.1012(o). Because this change

was not retroactive, AMC cannot rely on subsection (t) to subtract its costs of acquisition,

exhibition, or use for the tax years in question. 10

         B.       AMC’s film exhibitions do not transfer tangible personal property as required
                  by subsection (a)(1).

         Having concluded that a “sale” under section 171.1012(a)(1) must be a transfer, we next

consider whether AMC transfers tangible personal property when it exhibits films, such that it may

subtract its costs related to the property. Both aspects of this requirement—a transfer and tangible

personal property—must be satisfied. See id. § 171.1012(a)(1) (defining goods as “real or tangible

personal property sold in the ordinary course of business”). A taxable entity’s offerings may

include tangible personal property that is not transferred as well as intangible property that is

         9
           Whether a specific cost is considered a cost of exhibition as well as a cost of acquisition or use will depend
on the facts of each case, and we express no view on when or how frequently those categories will overlap—an issue
not addressed by the parties.
         10
            Nothing in our opinion precludes AMC from subtracting its exhibition costs in tax years following
subsection (t)’s enactment.

                                                          15
transferred—neither of which would satisfy the statute. Id.; see also id. § 171.1012(a)(3)(B)

(defining tangible personal property to exclude intangible property and services).

        Here, it is undisputed that AMC transfers to its patrons the right to see a film, but the

Comptroller argues—and AMC agrees—that this revocable license to watch a film is intangible.

See First Nat’l Bank of Fort Worth v. Bullock, 584 S.W.2d 548, 551 (Tex. App.—Austin 1979,

writ ref’d n.r.e.) (holding that sale of license was sale of intangible property). 11 Of course, the

films themselves are expressly defined as tangible personal property, but the Comptroller contends

AMC’s film exhibitions are a service and do not transfer or mass-distribute any “medium”

embodying the film’s creative content, as the film prong requires.                              See TAX CODE

§ 171.1012(a)(3)(A)(ii). AMC responds that when the film prong is read in context, it deems the

film’s creative content itself to be tangible personal property “without regard to . . . the medium in

which the [creative content] is embodied.” Id.

        We reject AMC’s construction of the film prong and hold that property with a physical or

demonstrable—that is, tangible—presence must be transferred. Transferring a film’s creative

content alone will not suffice. 12

        Although the film prong’s definition of tangible personal property does not contemplate a

particular medium, it does require that the “medium in which the property is embodied” is intended

or is reasonably likely to be mass-distributed. Id. According to AMC, the medium embodying

         11
            We recognize that certain licenses may meet the statutory definition of “tangible personal property.” But
here, AMC has conceded that “a bare license is intangible property.” We agree with AMC’s assertion that “the sale
of [tangible personal property] and the sale of an accompanying license can happen simultaneously,” but we conclude
no sale of tangible personal property occurred here for the reasons explained.
        12
             Given this holding, we need not decide whether film exhibition is a service.

                                                          16
exhibited films is its auditoriums’ speakers and screens. But AMC’s speakers and screens are not

mass-distributed, nor are they even transferred. 13

         The court of appeals relied on the perceptibility prong in its original opinion upholding

AMC’s subtractions, but we conclude it likewise requires a transfer of property with some physical

or demonstrable presence, which did not occur here. The perceptibility prong covers “personal

property . . . that is perceptible to the senses.” Id. § 171.1012(a)(3)(A)(i) (emphasis added).

Though “personal property” is not defined in the Tax Code, it generally means “everything that is

subject to ownership” that is not real property, San Antonio Area Found. v. Lang, 35 S.W.3d 636,

640 (Tex. 2000), most commonly interests in goods and money, see, e.g., TEX. EST. CODE

§ 22.028, TEX. PROP. CODE § 42.002(a). When AMC’s customers see a presentation, the only

personal property they leave with (excluding concessions) is a movie ticket. The “sights and

sounds” embodied in AMC’s theaters are certainly perceptible to the senses, but they are not

“subject to ownership” and thus cannot be personal property. Lang, 35 S.W.3d at 640.

                                                   CONCLUSION

         Because no tangible personal property is transferred through AMC’s film exhibitions, we

hold that the exhibitions are not goods under section 171.1012(a)(1). Therefore, AMC was not

entitled to subtract its costs related to the exhibitions as COGS for tax years 2008 and 2009. We

         13
             By concluding that the film prong requires the medium embodying a film’s creative content to be
distributed, we necessarily disagree with AMC’s contention that distribution of the content alone satisfies subsection
(a)(3)(A)(ii). AMC offers several examples in which it claims creative content is decoupled from the medium
traditionally embodying it when that content is sold: words and pictures are decoupled from printed books when
downloaded as e-books, and films are decoupled from DVDs when streamed digitally. Although we do not pass on
whether these digital forms of media constitute tangible personal property that is sold, we note that some medium is
transferred to the consumer in each of these scenarios—be it paper and ink, a disc, or data sent to a user’s device. No
such medium is transferred in a film exhibition.

                                                         17
reverse the court of appeals’ judgment and render judgment that AMC take nothing by its suit

concerning tax years 2008 and 2009.

                                          __________________________________
                                          J. Brett Busby
                                          Justice

OPINION DELIVERED: April 3, 2020

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