FILED 17-0894 12/20/2017 1:53 PM tex-21414862 SUPREME COURT OF TEXAS BLAKE A. HAWTHORNE, CLERK No. 17-0894 IN THE SUPREME COURT OF TEXAS _________________________________________________________________ Glenn Hegar, Comptroller of Public Accounts of the State of Texas and Ken Paxton, Attorney General of the State of Texas, Petitioners, v. Gulf Copper and Manufacturing Corporation, Respondent. _________________________________________________________________ On Petition for Review from the Third Court of Appeals at Austin, Texas Appeal No. 03-16-00250-CV _________________________________________________________________ Petition for Review _________________________________________________________________ KEN PAXTON JACK HOHENGARTEN Attorney General of Texas Tax Division Chief State Bar No. 09812200 JEFF MATEER Tax Division First Assistant Attorney General P.O. Box 12548; MC-029 Austin, Texas 78711-2548 BRANTLEY STARR TEL: (512) 475-3503 Deputy First Assistant Attorney FAX: (512) 478-4013 General Counsel for Petitioners JAMES E. DAVIS Deputy Attorney General for Civil Litigation IDENTITY OF PARTIES AND COUNSEL Petitioner: Glenn Hegar, Comptroller of Public Accounts of the State of Texas Ken Paxton, Attorney General for the State of Texas Counsel for Petitioners JACK HOHENGARTEN Tax Division, Division Chief Office of the Attorney General State Bar No. 09812200 Tax Division MC 029 PO Box 12548 Austin, Texas 78711-2548 Tel: (512) 475-3503 Fax: (512) 478-4013 Jack.hohengarten@oag.texas.gov Appellate Counsel CHARLES K. ELDRED Assistant Attorney General, Tax Division State Bar No. 00793681 Office of the Attorney General P.O. Box 12548 (MC 029) Austin, Texas 78711-2548 Tel: (512) 475-1743 Fax: (512) 478-4013 charles.eldred@oag.texas.gov Appellate and Trial Counsel Respondents Gulf Copper and Manufacturing Corporation Page ii Counsel for Respondents James F. Martens State Bar No. 13050720 jmartens@textaxlaw.com Danielle Ahlrich State Bar No. 24059215 dahlrich@textaxlaw.com MARTENS, TODD, LEONARD & AHLRICH 301 Congress Ave., Suite 1950 Austin, Texas 78701 Tel: (512) 542-9898 Appellate and Trial Counsel and Amanda Taylor BECK REDDEN, PLLC ataylor@beckredden.com State Bar No. 24045921 515 Congress Ave., Suite 1900 Austin, Texas 78701 Tel: (512) 708-1000 Appellate and Trial Counsel Page iii TABLE OF CONTENTS Identity of Parties and Counsel ................................................................ii Table of Contents ..................................................................................... iv Index of Authorities.................................................................................. vi Record References ..................................................................................viii Statement of the Case ............................................................................viii Statement of Jurisdiction .......................................................................... x Issues Presented...................................................................................... xii Statement of Facts .................................................................................... 1 Summary of the Argument ....................................................................... 5 Argument ................................................................................................... 7 I. Gulf Copper’s costs in repairing and outfitting drilling rigs, and Sabine Surveyors’ costs in surveying marine vessels, were not deductible as costs-of-goods sold. ................................... 7 A. Background: Tax Code section 171.1012. .................................... 7 B. There was no evidence of section 171.1012(i) costs to support a remand. ........................................................................ 9 C. The court of appeals’ decision regarding section 171.1012(i) also defeats other key provisions in the cost-of-goods-sold statute............................................................ 14 II. Gulf Copper cannot exclude the contested subcontractor payments from revenue under Tax Code §171.1011(g)(3). ......... 16 A. Background: Section 171.1011(g)(3)............................................ 16 B. There is no evidence that the subcontract work constituted “services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property”................................................. 18 Page iv C. There is no evidence that the subcontractor payments constituted “flow-through funds that are mandated by contract to be distributed to other entities.” ............................................ 21 Prayer ...................................................................................................... 25 Certificate of Compliance ........................................................................ 26 Certificate of Service ............................................................................... 26 Appendix .................................................................................................. 27 Appendix Table of Contents .................................................................... 28 Page v INDEX OF AUTHORITIES Cases Combs v. Newpark Resources, Inc., 422 S.W.3d 46 (Tex. App.—Austin 2013, no pet.) ......................... 12, 13 Owens Corning v. Hegar, 04-16-00211-CV, 2017 WL 1244444, at *3 (Tex. App.—San Antonio Apr. 5, 2017, pet. denied) ..................................................................... 24 Sheshunoff v. Sheshunoff, 172 S.W.3d 686 (Tex. App.—Austin 2005, pet. denied) ...................... 10 Titan Transp. LP v. Combs, 433 S.W.3d 627 (Tex. App.—Austin 2014, pet. denied) .......... 18, 19, 24 Statutes Tex. Gov't Code § 311.011(a) ............................................................. 12, 23 Tex. Gov't Code § 22.001(a) ...................................................................... ix Tex. Prop. Code § 53.023 ......................................................................... 10 Tex. Prop. Code § 53.001(3) & (4) ........................................................... 10 Tex. Prop. Code § 53.001(4)(B) ................................................................ 11 Tex. Prop. Code § 53.021 ......................................................................... 10 Tex. Prop. Code § 56.001(1) ..................................................................... 11 Tex. Tax Code §171.1011(i) ..................................................................... 16 Tex. Tax Code § 171.1011(g)(3) ....................................................... passim Tex. Tax Code § 171.1012................................................................ passim Tex. Tax Code § 171.1012(a)(3)(B)(ii) and (c)(1) ....................................... 5 Tex. Tax Code § 171.1012(a)(3)(B)(ii) ............................................. 5, 8, 14 Tex. Tax Code § 171.1012(c).................................................................. 4, 6 Tex. Tax Code § 171.1012(h) ................................................................... 11 Page vi Tex. Tax Code § 171.1012(i) ............................................................ passim Tex. Tax Code § 171.1012(a)(1) and (c) ..................................................... 8 Tex. Tax Code § 171.1012(c), (d), (f) ...................................................... 4, 6 Rules 34 TAC § 3.588 ........................................................................................ 10 Other Authorities 79th Leg., 3d C.S., ch.1, § 5, 2006 Tex. Gen. Laws 1, 10 (amended 2013) .................................................................................... 17 Act of May 2, 2006, 79th Leg., 3rd C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 8 (former Tex. Tax Code § 171.101(a)), current version at Tex. Tax Code § 171.101(a)(1)............................................................................... x 42. Tex. Reg. 5235-36 (Sept. 29, 2017) .................................................... 10 Page vii RECORD REFERENCES References to the Clerk’s Record are in the form “CR.[Page#]” References to the Reporter’s Record are in the form “[Volume#].RR.[Page#]” References to Plaintiff’s Exhibits are in the form “PX[Exhibit#]” References to Defendants’ Exhibits are in the form “DX[Exhibit#]” References to items in the Appendix are in the form “App.[Appendix#]” STATEMENT OF THE CASE Nature of the case: Franchise tax protest suit under Chapters 112 and 171 of the Texas Tax Code. Course of Proceedings: Lawsuit filed November 4, 2014. CR.3. Bench Trial February 1–2, 2016. Judgment entered February 22, 2016. CR 294–95 [App.1]. Notice of Appeal filed April 13, 2016. CR 302–03. Trial Court : 201st District Court, Travis County, Texas The Honorable Amy Clark Meachum. Disposition: Judgment for Plaintiff/Appellee. Plaintiff/Appellee entitled to refund of $838,117.84 plus statutory interest. Parties to the appeal: Appellants: Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General for the State of Texas Page viii Appellee: Gulf Copper and Manufacturing Corporation Court of appeals: Third Judicial District of Texas at Austin Justices who Chief Justice Rose, participated: Justices Field and Bourland Citation: Hegar v. Gulf Copper and Manufacturing Corporation, No. 03-16-0250-CV, 2017 WL 3471064 (Tex. App.—Austin Aug. 11, 2017) (herein, “Opinion at __.”) [App. C] Disposition: The Third Court of Appeals, opinion by Justice Field, affirmed in part and reversed and remanded in part to 201st Judicial District Court, Travis County, Texas, for further proceedings. Motion for Rehearing denied September 21, 2017. Page ix STATEMENT OF JURISDICTION This Court has jurisdiction under Texas Government Code section 22.001(a) because the case presents issues important to the jurisprudence of the state, specifically important issues of statutory interpretation that impact state revenue. Although Gulf Copper can deduct the contested amounts on its federal corporate income tax return or its financial statements, not all legitimate business expenses are deductible for margin tax purposes. By restricting margin tax deductions and thereby expanding the tax base, the Legislature was able to reduce the tax rate from 4.5 percent under the former earned surplus tax to one percent or less under the margin tax. See, Act of May 2, 2006, 79th Leg., 3rd C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 8 (former Tex. Tax Code § 171.101(a)), current version at Tex. Tax Code § 171.101(a)(1). If, however, the balance between the low margin tax rate and the limited deductions is disrupted, there could be a significant revenue impact to the State of Texas. Accordingly, this Court should give serious consideration to the implications of the Opinion below, which Page x allows service providers to take the cost-of-goods-sold deduction when they are not selling goods, and further, allows taxpayers to exclude revenues from margin merely because they are paying expenses owed under a contract. Page xi ISSUES PRESENTED 1. Do the services performed by Gulf Copper or its subsidiary constitute “furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance ... of real property” such that Gulf Copper may deduct under Tax Code section171.1012(i) its costs of: a. Repairing or upgrading drilling rigs at Gulf Copper’s waterfront facilities, before the commencement of offshore drilling; or b. Surveying marine vessels, including drilling rigs at Gulf Copper’s waterfront facilities? 2. May Gulf Copper exclude from its total revenue, under Tax Code section 171.1011(g)(3), hourly payments made to subcontractors? This question turns on: a. Whether payments were “made under a contract . . . to provide services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property,” when the subcontractor payments were for work repairing or upgrading drilling rigs at Gulf Copper’s waterfront facilities, before the commencement of offshore drilling. b. Whether payments Gulf Copper made to subcontractors are “flow-through funds that are mandated by contract to be distributed to other entities,” when Gulf Copper was not required by contract to use customer payments to pay subcontractors. 3. [Unbriefed] Gulf Copper had the burden of proof on its cost-of- good-sold claim. Where Gulf Copper put on no evidence of allowable costs according with section 171.1012 or controverting the Comptroller’s cost-by-cost analysis—relying instead on an erroneous legal argument—did the court of appeals err in remanding the case for a new trial on Gulf Copper’s cost-of- goods-sold claim? Page xii STATEMENT OF FACTS The margin tax dispute. The court of appeals correctly stated the nature of the case as a suit “seeking a refund of franchise taxes that Gulf Copper paid under protest.” Specifically, this franchise or “margin” tax case involves a dispute over (1) the amounts Gulf Copper may deduct as cost of goods sold, and (2) the amounts that it may exclude from its revenues. Gulf Copper’s business. The trial court made the following findings of fact regarding Gulf Copper’s business. Gulf Copper is primarily engaged in the business of surveying, manufacturing, upgrading, and repairing offshore drilling rigs. CR. 296-97[App. B] (Finding of Fact 10). 1 Gulf Copper repairs rigs 0F by removing defective portions, manufacturing replacement components, and installing the replacement components onto the rigs. Gulf Copper also manufactures and installs new components for rigs that do not 1 Although Gulf Copper manufactures components for the rigs, it is undisputed that it does not own, manufacture or sell the rigs themselves. 3.RR.39–40; see also Opinion at *4-5. Page 1 replace an existing component. Finding of Fact 12. Gulf Copper’s customers are primarily rig owners and drilling contractors who use their offshore rigs to drill for oil and gas on behalf of exploration and production (“E&P”) companies. Finding of Fact 9. Gulf Copper’s work enables the rigs (1) to meet and maintain the certification requirements by classification societies, (2) to comply with governing regulations, and (3) to satisfy an E&P company’s contractual requirement for a specific drilling project. Finding of Fact 16. Gulf Copper owns all of the outstanding shares of a subsidiary named Sabine Surveyors. Finding of Fact 1. Sabine Surveyors is a limited partnership primarily engaged in the business of marine vessel surveying. Finding of Fact 2. For franchise tax report year 2009 (the accounting period of May 1, 2007 to April 30, 2008), Gulf Copper, Sabine Surveyors, and others (hereinafter collectively referred to as “Gulf Copper”) joined in the filing of combined franchise tax report. Finding of Fact 7. With regard to the exclusions from revenue, the trial court made Page 2 these additional findings of fact. Gulf Copper performs its work using both employees and subcontractors. Finding of Fact 22. Gulf Copper’s customers often approve or require Gulf Copper’s use of certain subcontractors to complete the work... Finding of Fact 23. Gulf Copper charges its customers for subcontractor work using a formula that is based upon Gulf Copper’s actual cost of the subcontractor(s) plus a mark-up. Regardless of how the subcontractor is billed, Gulf Copper’s resulting mark-up to the customer is generally between 15-20 percent. Finding of Fact 24. When Gulf Copper’s customers pay Gulf Copper for work performed by subcontractors, Gulf Copper retains the portion of the payment attributable to its mark-up (generally between 15- 20 percent) and flows through the remainder of the customer’s payment to the subcontractor. Finding of Fact 25. The subcontractor payments flow from Gulf Copper’s customer, through Gulf Copper, to Gulf Copper's subcontractors who performed the work for the customer. Finding of Fact 26. Page 3 Finally, it is undisputed that “[t]he drilling rigs are delivered to Gulf Copper’s facility where Gulf Copper performs the work…” Opinion at * 4. The Comptroller’s audit. The Comptroller audited Gulf Copper and assessed additional franchise taxes in the amount of $692,626.66 (plus interest, for a then current total of $838,117.84). The two major adjustments were to: (1) the cost-of-goods-sold deduction and; (2) the exclusion from revenue of subcontractor payments. The Comptroller allowed the cost-of-goods-sold deduction for labor costs incurred in the production or “fabrication” of rig components and parts installed on the rigs (and thus “sold” to the rig owners), plus other costs specifically allowable under the statute. See Opinion at * 3; see also Tex. Tax Code § 171.1012(c), (d), (f). But the Comptroller disallowed, as non-deductible “services,” Gulf Copper’s labor costs incurred in installing components, removing defective components, painting, welding, fixing cranes, sandblasting, and coating—because none of those labor costs were shown to be costs of acquiring or producing “goods” for sale. See id. Page 4 § 171.1012(a)(3)(B)(ii) and (c)(1); CR. 297 (Findings of Fact 10, 12, 13 [App. B]; 2.RR.131-32, 188, 192. The Comptroller auditor also disallowed Sabine Surveyors’ costs in his calculation of Gulf Copper’s cost-of-goods-sold deduction—because surveying is a service and the costs of surveying are not costs of acquiring or producing “goods” for sale. 5.RR.11–15. As to the second audit issue, the Comptroller auditor determined that the $79,405,230 in payments to subcontractors did not meet the statutory requirements for the exclusion from revenue, and should be considered instead in the calculation of Gulf Copper’s cost-of-goods-sold deduction. Gulf Copper paid the assessment under protest, and these two adjustments are the principal issues in this Petition for Review. SUMMARY OF THE ARGUMENT Cost-of-goods-sold deduction There is no evidence in the record to support the contested deductions. Gulf Copper does not own or sell drilling rigs – it repairs and outfits them at its waterfront facility. The repair and outfitting of Page 5 drilling rigs is not the sale of “goods.” Therefore, Gulf Copper’s costs in repairing and outfitting the rigs are not deductible as costs of acquiring or producing “goods” under Tax Code § 171.1012(c), (d), or (f). Furthermore, in performing rig work at its waterfront facility, Gulf Copper is not “furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance . . . of real property. . .” Rather, it is providing repair and outfitting services to the owner of equipment, who in turn, contracts with the E&P company to provide that equipment for offshore drilling. This indirect relationship does not qualify Gulf Copper for the cost-of-goods- sold deduction under Tax Code § 171.1012(i). Gulf Copper’s rig work adds value to the rigs, but it does not add value to any real-property project. Gulf Copper’s affiliate, Sabine Surveyors, does not own or sell goods either. And similarly, Sabine Surveyors is not by virtue of its surveying services, furnishing labor or materials “to a project for the construction, improvement, remodeling, repair, or industrial maintenance ... of real property,” so as to qualify for the cost-of-goods-sold deduction under Tax Code § 171.1012(i). Page 6 Revenue exclusion for subcontractor payments With regard to the flow-through exclusion from revenue, the payment of subcontractors for rig repair, before the commencement of drilling, does not constitute evidence of payment for “services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property” under Texas Tax Code §171.1011(g)(3). Furthermore, the flow-through exclusion is proper only where the taxpayer is contractually obligated to pay its subcontractors from or based on payments that it has received from other parties, and, here, there is no such contract in evidence. ARGUMENT I. Gulf Copper’s costs in repairing and outfitting drilling rigs, and Sabine Surveyors’ costs in surveying marine vessels, were not deductible as costs-of-goods sold. A. Background: Tax Code section 171.1012. Gulf Copper determined its “margin” by deducting cost of goods sold from total revenue. Opinion at *3. The cost-of-goods-sold deduction is governed by Tax Code section 171.1012, which permits a business to Page 7 subtract “all direct costs of acquiring or producing the goods.” Tex. Tax Code § 171.1012(a)(1) and (c). “Goods” means “real or tangible personal property sold in the ordinary course of business of a taxable entity.” Id. The definition of “tangible personal property” expressly excludes “services.” Id. § 171.1012(a)(3)(B)(ii)). Thus, sellers of services are not ordinarily eligible for the cost-of-goods-sold deduction. To take a deduction under the cost-of-goods-sold statute, the entity must own the “goods” that it sells. Id. § 171.1012(i). Gulf Copper did not own the drilling rigs that it repaired and outfitted, and Sabine Surveyors did not own the marine vessels that it surveyed. The third sentence of subsection (i), however, allows certain service providers to subtract their costs from revenue as cost-of-goods-sold by “considering” them to be owners of their labor and materials: A taxable entity furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance ... of real property is considered to be an owner of that labor or materials and may include the costs, as allowed by this section, in the computation of cost of goods sold. Page 8 B. There was no evidence of section 171.1012(i) costs to support a remand. Because there was no evidence supporting application of the subsection (i)’s third sentence, the court of appeals erred when it concluded that: Gulf Copper presented evidence at trial that, to some extent, Gulf Copper’s employees provided labor and materials to projects for improvement of real property (drilling oil wells). The Comptroller was obligated to consider to what extent the activities of Gulf Copper’s employees were essential and direct components of those specific projects. Opinion at *14. Similarly, the court erred when it concluded that “Sabine Surveyors’ costs should have been analyzed on a cost-by-cost basis to determine which of those costs met the requirement that they be integral, essential, and direct components of the offshore drilling process.” Id. Remand is inappropriate here, because Gulf Copper and its subsidiary’s services do not constitute “furnishing labor and materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance ... of real property. . .” Thus, their services do not qualify for the cost-of-goods-sold deduction under subsection (i). Tex. Tax. Code § 171.1012(i). Page 9 Subsection (i)’s phrase “furnishing labor or materials” is nearly identical to the Property Code phrase “furnishes labor or materials.” See Tex. Prop. Code § 53.021 (“Persons Entitled to Lien”). Therefore, it is reasonable to assume that the Legislature intended substantially similar meanings. See, e.g., Sheshunoff v. Sheshunoff, 172 S.W.3d 686, 692 (Tex. App.—Austin 2005, pet. denied) (“When the same or a similar term is used in the same connection in different statutes, the term will be given the same meaning in one as in the other, unless there is something to indicate that a different meaning was intended.”) The Property Code provides that a person who “furnishes labor or materials” for the construction, repair, or demolition of a real property improvement may establish a lien on the real property to secure payment for the labor done or material furnished. See Tex. Prop. Code §§ 53.021 and 53.023 (“Payment Secured by Lien.”). The definitions limit “labor” and “materials” to those used in the “direct prosecution” of the work. Id. at § 53.001(3) & (4). 2 1F 2 The Comptroller has proposed rules amending 34 TAC § 3.588, which would use the Property Code definitions to define “labor” and “materials” in section 171.1012(i). See 42. Tex. Reg. 5235-36 (Sept. 29, 2017). Page 10 Application of the Property Code definitions provides this clear test for costs claimed under subsection (i): could Gulf Copper obtain a lien on the offshore drilling project? Here, the answer is “no.” Mechanics and materialman’s liens are limited to “running repairs” performed on equipment while it is being used on the project site. See Tex. Prop. Code § 53.001(4)(B). 3 2F Gulf Copper tendered no evidence that the costs it seeks to deduct included any of these activities. Indeed, to establish its entitlement to the disputed deductions, Gulf Copper relied solely on an erroneous legal interpretation of subsection 171.1012(h)—which the court of appeals expressly rejected. Opinion at *9, 12. This lack of evidence requires a rendition of judgment regarding section 171.1012 costs rather than remand. The definitions of “labor” and “materials” in the Property Code – limiting the terms to labor and materials used in the “direct prosecution” of a project – accord with subsection (i)’s words and phrases in their 3 Furthermore, mineral property liens under Property Code Chapter 56 are limited to “digging, drilling, torpedoing, operating, completing, maintaining, or repairing an oil, gas, or water well.” Tex. Prop. Code § 56.001(1). Page 11 proper context, as well as with the rules of grammar and usage. See Tex. Gov't Code Ann. § 311.011(a) (West 2013). The phrase “to a project for the construction, improvement . . . of real property” is prepositional phrase that functions as an adjective modifying and limiting the antecedent phrase “furnishing labor or materials.” The court of appeals nonetheless concluded that Gulf Copper “presented evidence at trial that, to some extent” it provided labor or materials that were “essential and direct components” of “specific projects.” Opinion at *14. The court’s “essential and direct components” language comes from its opinion in Newpark. In that case, the court distinguished labor that was an “essential and direct component” of the drilling project from labor “too far removed” from the project. Opinion at *14 (citing Combs v. Newpark Resources, Inc., 422 S.W.3d 46, 57 (Tex. App.—Austin 2013, no pet.)). The taxpayer in Newpark was able to obtain the subsection (i) deductions for labor furnished in hauling away used drilling mud and other waste products from oil well drilling sites. 422 S.W.3d at 48. But that labor was provided to the oil wells. In contrast, Gulf Copper’s work was at least two steps removed from a real-property project. It provided Page 12 outfitting and repair services to its customers—the rig owners—who, in turn, contracted with the E&P companies to provide them with the rigs for offshore drilling. The E&P companies then used the rigs in projects for real-property improvements or construction. This Court has never adopted the “essential and direct components” test in Newpark. But even if the Court accepts that formulation, the repair and outfitting of a rig owned and operated by a third party, prior to commencement of drilling by yet another third party at a different site offshore, cannot be viewed as a “direct component” of drilling. Gulf Copper’s work is “too far removed” from the construction project. Gulf Copper fixed construction equipment. As a matter of law, fixing or upgrading construction equipment prior to its utilization is not “furnishing labor or materials to a project for the construction, improvement ... of real property” under subsection (i). Just as fixing a bulldozer before its delivery to and use on a construction site should be properly classified as the repair of tangible personal property rather than real-property improvements, so Gulf Copper’s rig work at its waterfront yards constituted the repair and upgrading of tangible personal property, not “furnishing labor or materials to” a construction project. Gulf Page 13 Copper’s rig work added value to the rigs, but it did not add value to any real-property project. This analysis applies with equal if not greater force to Sabine Surveyors, which inspected the rigs and other marine vessels. There is no evidence the subsidiary inspected offshore drilling operations or any other real-property improvements. C. The court of appeals’ decision regarding section 171.1012(i) also defeats other key provisions in the cost-of-goods-sold statute. The court’s decision undermines the explicit exclusion of “services” from the definition of “tangible personal property” and thus from the definition of “goods.” See id. § 171.1012(a)(3)(B)(ii). It does so by allowing the taxpayer to deduct labor costs for installing components, removing defective components, painting, welding, fixing cranes, sandblasting, and coating—even though these services had only an indirect relationship to the construction or improvement of real property. CR. 296-97 (Findings of Fact No. 10, 12 and 13)[App. B]; 2.RR.131–32, 188, 192. The cost of a service may be allowable in a cost-of-goods-sold deduction only if the service is a cost of acquiring or producing a “good” Page 14 that an entity sells or is labor in the “direct prosecution” of a real-property project. Returning to the example of a bulldozer, this is why under section 171.1012, the salaries of employees who paint, repair, upgrade a bulldozer for sale would be allowable in the seller’s cost-of-goods-sold deduction. The salaries are costs of “producing” the equipment “sold.” But apart from the acquisition or production expenses for the sale of the bulldozer, costs of providing services to repair, upgrade, or paint the bulldozer are not deductible. And these services do not qualify for the deduction simply because the owner of the bulldozer repaired, upgraded or painted subsequently provides it to a real-property project. Nor would the person performing the repair, upgrade or painting be able to claim the deduction. Similarly, Gulf Copper is not selling rigs to a third-party, but rather, is providing repair and outfitting services performed at its waterfront facility. 4 That the rigs are then used by another third party 3F 4 Again, the comptroller has already allowed the deduction for the labor costs incurred in “producing” “goods”—i.e., parts and components Gulf Copper installed on the rigs and thus sold. Page 15 to drill offshore does not transform Gulf Copper’s services into “labor” used in “direct prosecution” of the project under subsection (i). II. Gulf Copper cannot exclude the contested subcontractor payments from revenue under Tax Code §171.1011(g)(3). A. Background: Section 171.1011(g)(3) Taxpayers such as Gulf Copper must first determine their revenue before deducting cost of goods sold to determine “margin.” In limited circumstances, the Texas Legislature has allowed taxpayers to exclude receipts that they are obligated by law or contract or fiduciary duty to pass on to another. The theory is that the receipts do not truly represent the revenue of the taxpayers. However, taxpayers are not allowed to exclude receipts merely because the receipts are used to pay the taxpayers’ expenses. If that were the case, the “margin” tax would become a net income tax. To prevent just that outcome, Tax Code §171.1011(i) specifically provides: Except as provided by Subsection (g), a payment made under an ordinary contract for the provision of services in the regular course of business may not be excluded. In this case, the question is whether the payments were made under an ordinary contract for the provision of services or whether they Page 16 were flow-through payments to subcontractors under section 171.1011(g)(3), which provided during the period at issue: A taxable entity shall exclude from its total revenue, to the extent [reported to the IRS as income], only the following flow- through funds that are mandated by contract to be distributed to other entities: .... (3) subcontracting payments handled by the taxable entity to provide services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property or the location of the boundaries of real property. Act of May 19, 2006, 79th Leg., 3d C.S., ch.1, § 5, 2006 Tex. Gen. Laws 1, 10 (amended 2013) (“the (g)(3) revenue exclusion”). There are two requirements at issue: there must be “flow- through funds that are mandated by contract to be distributed to other entities,” and the flow-through funds must be for “services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property.” Page 17 B. There is no evidence that the subcontract work constituted “services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property” Finding of Fact 29 reads in part, “Gulf Copper, through its employees and subcontractors, provides labor and materials in connection with the actual or proposed construction or repair of improvements on real property;…” CR.298 [App.2]. This finding tracks the statutory language of section 171.1011(g)(3) and is really a conclusion of law reviewed de novo, without deference. It should be rejected. The court of appeals conceded that the phrase “in connection with” is “one ‘of intentional breadth,’ but not without ‘logical limit.’” Opinion at *7 (quoting Titan Transp. LP v. Combs, 433 S.W.3d 627, 637-38 (Tex. App.—Austin 2014, pet. denied)). The “logical limit” has been exceeded here for these reasons: • Gulf Copper’s work was temporally remote from the projects to improve real property – the work was performed before drilling operations commenced. • Gulf Copper’s work was physically remote from the projects to improve real property – the work was performed on tangible personal property at Gulf Copper’s waterfront yards and not at the offshore drilling sites, or oil and gas wells. Page 18 • Gulf Copper’s work was contractually remote from the projects to improve real property – Gulf Copper’s contracts were with the rig owners, not the project owners, and Gulf Copper was not a subcontractor to the project owners. And, when Gulf Copper finished its work, the offshore drilling projects had no greater value than before Gulf Copper started. This is the “logical limit” of the (g)(3) revenue exclusion. 5 4F Of course, the rigs that Gulf Copper repairs and modifies are used by third parties to construct oil and gas wells, and oil and gas wells are improvements to real property. For this reason, the State does not challenge Findings of Fact 20: “Offshore drilling rigs are necessary and essential to the drilling of offshore oil and gas wells because the wells could not be drilled without the drilling rigs”) or Finding of Fact 30 (“The labor and materials provided by Gulf Copper through its employees and subcontractors are necessary, essential, and integral to the construction 5 While this part of the (g)(3) revenue exclusion is similar to the real-property project requirement in the third-sentence of subsection (i), there are differences. Subsection (i) does not contain the word “services.” It refers to “labor or materials furnished “to” a real-property project, rather than “services, labor or materials” provided “in connection with” such projects. Nevertheless, Gulf Copper’s work does not qualify for the revenue exclusion even under the broader phrasing in subsection (g)(3). It is still too “remote or attenuated” to qualify. See Titan Transp. 433 S.W.3d at 638. The court of appeals’ decision does not account for the use of different words and phrases in these two subsections. Page 19 … of oil and gas wells.”). CR.298, 299 [App.2]. But just as narrow focus on necessity or indispensability would improperly broaden the statutory test under subsection (i), these findings are, as a matter of law, insufficient to pull the subcontractor payments into the (g)(3) revenue exclusion. The taxpayer’s indispensability argument—which is really none other than a “but for,” cause-in-fact argument—“proves too much.” Undoubtedly, there are many necessary or essential preconditions—business organization, administrative services support, surveying, geoseismic testing, research—for oil wells and other real-property projects. And, no doubt, these and other necessary preconditions will themselves require the furnishing of labor or materials. But the mere fact that the disputed labor or materials are in the causal chain leading up to the real-property project is not evidence supporting the (g)(3) revenue exclusion. Another precondition of the project would be a written drilling contract between the rig owner and the E&P company. Should the law firm that drafted the contract for the rig owner be able to exclude its expenses because the expenses were incurred “in connection with” the improvement of real property? Gulf Page 20 Copper is in the same position as the law firm, providing services to the rig owner antecedent to the drilling project and not providing any value to the drilling project itself. C. There is no evidence that the subcontractor payments constituted “flow-through funds that are mandated by contract to be distributed to other entities.” Even if the Court rejects the State’s primary contention and finds that the subcontractor payments were made in connection with the construction or improvements of real property, there must still be evidence that the payments were mandated by contract to be distributed to the subcontractors. Gulf Copper’s two biggest contracts with rig owners, the Pride and Helix contracts, involved two types of subcontractor labor – hourly and cost-plus. Under the hourly labor provisions, employees of the subcontractor worked side-by-side with Gulf Copper employees, performing the same work. Gulf Copper paid these subcontractors a flat hourly rate. And under the Pride and Helix contracts, the rig owners paid Gulf Copper a higher flat hourly rate—paying the same rate for regular labor performed Page 21 by Gulf Copper employees and its subcontractors. 2.RR.110–113. 4.RR.104–05; PX1 at P00220 (Pride Contract) [App.9]; PX2 at P0072 (Helix contract). Indeed, with respect to regular labor, the Pride and Helix contracts said nothing at all about subcontractors. But for the second type of subcontractor labor involving specialty services, the Pride and Helix contracts specified that payments were cost plus 15% (in the case of the Pride contract) and cost plus 20% (in the case of the Helix contract). PX1 at P00221 [App.9]; PX2 at P00073 [App.10]; 2.RR.112. 6 5F At trial, the State conceded that $32.0 million in subcontractor payments—reflecting the specialty services governed by the cost-plus provisions in the Pride and Helix contracts—were flow-through funds mandated by contract to be distributed to the subcontractors. But the State continued to urge that the other payments—reflecting the hourly- rate subcontractors—were not flow-through funds. With respect to those payments, no contract mandated that any customer payment for 6 Gulf Copper also made subcontractor payments under six other contracts in addition to the Pride and Helix contracts. But none of those six contracts were cost-plus contracts. PX3, PX4, PX5, PX6, PX7, PX8. Page 22 labor be distributed to the subcontractors. The trial court and the court of appeals erred when they concluded these payments were nonetheless flow-through funds mandated by contract to be distributed to other entities. Opinion at *6. Though Gulf Copper was contractually obligated to pay the subcontractors for “labor,” it was not contractually obligated to pass on or flow-through customer payments to them. That makes all the difference under the plain language of the statute. Neither the court of appeals nor Gulf Copper pointed to any contractual mandate in the customer contracts or in the subcontracts that required Gulf Copper to share customer payments with its subcontractors. When examining statutory text, the Code Construction Act mandates that the Court read words and phrases in context and construe them according to the rules of grammar and usage. Tex. Gov't Code Ann. § 311.011(a) (West 2013); see also supra at 11-12. The phrase “flow- through funds that are mandated by contract to be distributed to other entities” is a single unified requirement. The dependent clause “that are mandated by contract to be distributed to other entities” is an adjective Page 23 that specifies and limits the type of flow-through funds excludable from revenue. The court of appeals’ approach effectively reads out of the statute the requirement that a contract mandate that funds be distributed to other entities. Gulf Copper was not contractually obligated to mark-up anything or, for that matter, to do anything at all besides paying the subcontractors an hourly rate. Although the court of appeals relied on Titan Transp., LP v. Combs, 433 S.W.3d 625 (Tex. App.—Austin 2014, pet. denied), that case is readily distinguishable. There, the taxpayer had “contracts with its subcontractors that required [the taxpayer] to pay 84% of its gross receipts [from customers] to independent contractors.” Titan Transp., 433 S.W.3d at 630. Alternatively, in the event of ambiguity, this statute is a tax exclusion, which like tax exemptions, must be construed strictly against Gulf Copper. See Owens Corning v. Hegar, 04-16-00211-CV, 2017 WL 1244444, at *3 (Tex. App.—San Antonio Apr. 5, 2017, pet. denied) (holding that the cost-of-goods-sold deduction is a tax exemption for the same reason). Page 24 PRAYER For these reasons, the court should grant the petition for review and upon further briefing on the merits, reverse and render judgment. Respectfully submitted, KEN PAXTON Attorney General JEFFREY C. MATEER First Assistant Attorney General BRANTLEY STARR Deputy First Assistant Attorney General JAMES E. DAVIS Deputy Attorney General for Civil Litigation /s/ Jack Hohengarten JACK HOHENGARTEN Tax Division Chief State Bar No. 09812200 Tax Division MC 029 PO Box 12548 Austin, Texas 78711-2548 Tel: (512) 475-3503 Fax: (512) 478-4013 Attorneys for Petitioners Page 25 CERTIFICATE OF COMPLIANCE I certify the Petitioner’s Petition for Review contains 4493 words, excluding portions exempted by Rule 9.4(i)(1). /s/ Jack Hohengarten JACK HOHENGARTEN CERTIFICATE OF SERVICE I certify that on December 20, 2017, a copy of this document was served on all parties and counsel of record by email and eservice, as follows: James F. Martens Danielle V. Ahlrich MARTENS, TODD, LEONARD & AHLRICH 301 Congress Ave., Ste. 1950 Austin, Texas 78701 Amanda G. Taylor BECK REDDEN LLP 515 Congress Avenue Suite 1900 Austin, Texas 78701 /s/ Jack Hohengarten JACK HOHENGARTEN Page 26 No. 17-0894 IN THE SUPREME COURT OF TEXAS _________________________________________________________________ Glenn Hegar, Comptroller of Public Accounts of the State of Texas and Ken Paxton, Attorney General of the State of Texas, Petitioners, v. Gulf Copper and Manufacturing Corporation, Respondent. _________________________________________________________________ On Petition for Review from the Third Court of Appeals at Austin, Texas Appeal No. 03-16-00250-CV _________________________________________________________________ APPENDIX TO PETITIONERS’ PETITION FOR REVIEW ________________________________________________________________ KEN PAXTON JACK HOHENGARTEN Attorney General of Texas Tax Division Chief State Bar No. 09812200 JEFF MATEER Tax Division First Assistant Attorney General P.O. Box 12548; MC-029 Austin, Texas 78711-2548 BRANTLEY STARR TEL: (512) 475-3503 Deputy First Assistant Attorney FAX: (512) 478-4013 General Counsel for Petitioners JAMES E. DAVIS Deputy Attorney General for Civil Litigation Page 27 APPENDIX TABLE OF CONTENTS Tab Final Judgment of the Trial Court……………………………………….A Findings of Fact and Conclusions of Law……………………………….B Opinion and Judgment of the Third Court of Appeals………………..C TEX. TAX CODE § 171.1012………………………………………………....D-1 TEX. TAX CODE § 171.1011………………………………………………....D-2 TEX. PROP. CODE § 53.001……………………………………………….....D-3 TEX. PROP. CODE § 53.021…………………………………………....…….D-4 TEX. PROP. CODE § 53.023……………………………………..……..…….D-5 Page 28 APPENDIX A Flied In The District Court of Travis County, Texas CAU SE NO. D-\-( ;N-1 4-004620 At FE~ 2jj016 Q ~ Velva L. Price , District Clerk c; ULF COP PER & :vtA NUF ACT llRIN G ~ IN THF. DIST RIC T COl iRT OF COR POR ATIO N, § Plain tiff § § v. § § TRA VIS COU NTY , TfX AS GLENN HEG AR § COM PTR OI.L F.R OF PUB LI C § ACC OUN TS OF TIIF . STATF: OF TEX AS; § AND KEN PAX TON , ATT ORN EY ~ GF:NF.RAL OF THE STA TE OF TEX AS, § Defendants § 53rc.t .JUl )ICIA L DIST RIC T FINAL .JlJDG ME~ T l)urin g the week o(Te hrua r:, I, 2016. the abov e-entitled ma!tcr was tried to the bench in the 20 I st District Court of Trav is County. Texas. After cons idering the evickncc. the brid i ng. the plead ings. and argument s of counsel, the Court order s that Plaintiff is (.'t1titlc d t1) a fu ll refun J of it s franchise ta:-: protest paym ent for repor t year 2009. IT IS Tl !ERi TOR E ORDERED. AD.ll.:l)(iED /\ND DECREE D that D-:lc ndant s shall pay Plaintiff the full amou nt paid by Plain tiff unde r prote st in thi s matte r ($838.1 17.84 ). plus al l statutory interest and costs as allow-: (g-7) A taxable entity that is a qualified courier and logistics company shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), subcontracting payments made by the taxable entity to nonemployee agents for the performance of delivery services on behalf of the taxable entity. For purposes of this subsection, “qualified courier and logistics company” means a taxable entity that: (1) receives at least 80 percent of the taxable entity's annual total revenue from its entire business from a combination of at least two of the following courier and logistics services: (A) expedited same-day delivery of an envelope, package, parcel, roll of architectural drawings, box, or pallet; (B) temporary storage and delivery of the property of another entity, including an envelope, package, parcel, roll of architectural drawings, box, or pallet; and (C) brokerage of same-day or expedited courier and logistics services to be completed by a person or entity under a contract that includes a contractual obligation by the taxable entity to make payments to the person or entity for those services; (2) during the period on which margin is based, is registered as a motor carrier under Chapter 643, Transportation Code, and if the taxable entity operates on an interstate basis, is registered as a motor carrier or broker under the unified carrier registration system, as defined by Section 643.001, Transportation Code, during that period; (3) maintains an automobile liability insurance policy covering individuals operating vehicles owned, hired, or otherwise used in the taxable entity's business, with a combined single limit for each occurrence of at least $1 million; (4) maintains at least $25,000 of cargo insurance; (5) maintains a permanent nonresidential office from which the courier and logistics services are provided or arranged; (6) has at least five full-time employees during the period on which margin is based; (7) is not doing business as a livery service, floral delivery service, motor coach service, taxicab service, building supply delivery service, water supply service, fuel or energy supply service, restaurant supply service, commercial moving and storage company, or overnight delivery service; and © 2017 Thomson Reuters. No claim to original U.S. Government Works. 5 § 171.1011. Determination of Total Revenue from Entire Business, TX TAX § 171.1011 (8) is not delivering items that the taxable entity or an affiliated entity sold. (g-7) A taxable entity that is a qualified courier and logistics company shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), subcontracting payments made by the taxable entity to nonemployee agents for the performance of delivery services on behalf of the taxable entity. For purposes of this subsection, “qualified courier and logistics company” means a taxable entity that: (1) receives at least 80 percent of the taxable entity's annual total revenue from its entire business from a combination of at least two of the following courier and logistics services: (A) expedited same-day delivery of an envelope, package, parcel, roll of architectural drawings, box, or pallet; (B) temporary storage and delivery of the property of another entity, including an envelope, package, parcel, roll of architectural drawings, box, or pallet; and (C) brokerage of same-day or expedited courier and logistics services to be completed by a person or entity under a contract that includes a contractual obligation by the taxable entity to make payments to the person or entity for those services; (2) during the period on which margin is based, is registered as a motor carrier under Chapter 643, Transportation Code, and if the taxable entity operates on an interstate basis, is registered as a motor carrier or broker under the motor vehicle registration system established under 49 U.S.C. Section 14504a or a similar federal registration program that replaces that system during that period; (3) maintains an automobile liability insurance policy covering individuals operating vehicles owned, hired, or otherwise used in the taxable entity's business, with a combined single limit for each occurrence of at least $1 million; (4) maintains at least $25,000 of cargo insurance; (5) maintains a permanent nonresidential office from which the courier and logistics services are provided or arranged; (6) has at least five full-time employees during the period on which margin is based; (7) is not doing business as a livery service, floral delivery service, motor coach service, taxicab service, building supply delivery service, water supply service, fuel or energy supply service, restaurant supply service, commercial moving and storage company, or overnight delivery service; and (8) is not delivering items that the taxable entity or an affiliated entity sold. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 6 § 171.1011. Determination of Total Revenue from Entire Business, TX TAX § 171.1011 (g-8) A taxable entity that is primarily engaged in the business of transporting aggregates shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), subcontracting payments made by the taxable entity to independent contractors for the performance of delivery services on behalf of the taxable entity. In this subsection, “aggregates” means any commonly recognized construction material removed or extracted from the earth, including dimension stone, crushed and broken limestone, crushed and broken granite, other crushed and broken stone, construction sand and gravel, industrial sand, dirt, soil, cementitious material, and caliche. (g-10) A taxable entity that is primarily engaged in the business of transporting barite shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), subcontracting payments made by the taxable entity to nonemployee agents for the performance of transportation services on behalf of the taxable entity. For purposes of this subsection, “barite” means barium sulfate (BaSO4), a mineral used as a weighing agent in oil and gas exploration. (g-11) A taxable entity that is primarily engaged in the business of performing landman services shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), subcontracting payments made by the taxable entity to nonemployees for the performance of landman services on behalf of the taxable entity. In this subsection, “landman services” means: (1) performing title searches for the purpose of determining ownership of or curing title defects related to oil, gas, or other related mineral or petroleum interests; (2) negotiating the acquisition or divestiture of mineral rights for the purpose of the exploration, development, or production of oil, gas, or other related mineral or petroleum interests; or (3) negotiating or managing the negotiation of contracts or other agreements related to the ownership of mineral interests for the exploration, exploitation, disposition, development, or production of oil, gas, or other related mineral or petroleum interests. (h) If the taxable entity belongs to an affiliated group, the taxable entity may not exclude payments described by Subsection (f), (g), (g-1), (g-2), (g-3), or (g-4) that are made to entities that are members of the affiliated group. (i) Except as provided by Subsection (g), a payment made under an ordinary contract for the provision of services in the regular course of business may not be excluded. (j) Any amount excluded under this section may not be included in the determination of cost of goods sold under Section 171.1012 or the determination of compensation under Section 171.1013. (k) A taxable entity that is a professional employer organization shall exclude from its total revenue payments received from a client for wages, payroll taxes on those wages, employee benefits, and workers' compensation benefits for the covered employees of the client. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 7 § 171.1011. Determination of Total Revenue from Entire Business, TX TAX § 171.1011 (l) For purposes of Subsection (g)(1): (1) “Sales commission” means: (A) any form of compensation paid to a person for engaging in an act for which a license is required by Chapter 1101, Occupations Code; or (B) compensation paid to a sales representative by a principal in an amount that is based on the amount or level of certain orders for or sales of the principal's product and that the principal is required to report on Internal Revenue Service Form 1099-MISC. (2) “Principal” means a person who: (A) manufactures, produces, imports, distributes, or acts as an independent agent for the distribution of a product for sale; (B) uses a sales representative to solicit orders for the product; and (C) compensates the sales representative wholly or partly by sales commission. (m) A taxable entity shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), dividends and interest received from federal obligations. (m-1) A taxable entity that is a management company shall exclude from its total revenue reimbursements of specified costs incurred in its conduct of the active trade or business of a managed entity, including “wages and cash compensation” as determined under Sections 171.1013(a) and (b). (n) Except as provided by Subsection (o), a taxable entity that is a health care provider shall exclude from its total revenue: (1) to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), the total amount of payments the health care provider received: (A) under the Medicaid program, Medicare program, Indigent Health Care and Treatment Act (Chapter 61, Health and Safety Code), and Children's Health Insurance Program (CHIP); (B) for professional services provided in relation to a workers' compensation claim under Title 5, Labor Code; 1 and (C) for professional services provided to a beneficiary rendered under the TRICARE military health system; and © 2017 Thomson Reuters. No claim to original U.S. Government Works. 8 § 171.1011. Determination of Total Revenue from Entire Business, TX TAX § 171.1011 (2) the actual cost to the health care provider for any uncompensated care provided, but only if the provider maintains records of the uncompensated care for auditing purposes and, if the provider later receives payment for all or part of that care, the provider adjusts the amount excluded for the tax year in which the payment is received. (n-1) The comptroller shall adopt rules governing: (1) the computation of the actual cost to a health care provider of any uncompensated care provided under Subsection (n)(2); and (2) the audit requirements related to the computation of those costs. (o) A health care provider that is a health care institution shall exclude from its total revenue 50 percent of the amounts described by Subsection (n). (p) In this section: (1) “Federal obligations” means: (A) stocks and other direct obligations of, and obligations unconditionally guaranteed by, the United States government and United States government agencies; and (B) direct obligations of a United States government-sponsored agency. (2) “Health care institution” means: (A) an ambulatory surgical center; (B) an assisted living facility licensed under Chapter 247, Health and Safety Code; (C) an emergency medical services provider; (D) a home and community support services agency; (E) a hospice; (F) a hospital; © 2017 Thomson Reuters. No claim to original U.S. Government Works. 9 § 171.1011. Determination of Total Revenue from Entire Business, TX TAX § 171.1011 (G) a hospital system; (H) an intermediate care facility for the mentally retarded or a home and community-based services waiver program for persons with mental retardation adopted in accordance with Section 1915(c) of the federal Social Security Act (42 U.S.C. Section 1396n); (I) a birthing center; (J) a nursing home; (K) an end stage renal disease facility licensed under Section 251.011, Health and Safety Code; or (L) a pharmacy. (3) “Health care provider” means a taxable entity that participates in the Medicaid program, Medicare program, Children's Health Insurance Program (CHIP), state workers' compensation program, or TRICARE military health system as a provider of health care services. (4) “Obligation” means any bond, debenture, security, mortgage-backed security, pass-through certificate, or other evidence of indebtedness of the issuing entity. The term does not include a deposit, a repurchase agreement, a loan, a lease, a participation in a loan or pool of loans, a loan collateralized by an obligation of a United States government agency, or a loan guaranteed by a United States government agency. (4-a) “Pro bono services” means the direct provision of legal services to the poor, without an expectation of compensation. (4-b) Repealed by Acts 2007, 80th Leg., ch. 1282, § 37(2). (5) “United States government” means any department or ministry of the federal government, including a federal reserve bank. The term does not include a state or local government, a commercial enterprise owned wholly or partly by the United States government, or a local governmental entity or commercial enterprise whose obligations are guaranteed by the United States government. (6) “United States government agency” means an instrumentality of the United States government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the United States government. The term includes the Government National Mortgage Association, the Department of Veterans Affairs, the Federal Housing Administration, the Farmers Home Administration, the Export-Import Bank, the Overseas Private Investment Corporation, the Commodity Credit Corporation, the Small Business Administration, and any successor agency. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 10 § 171.1011. Determination of Total Revenue from Entire Business, TX TAX § 171.1011 (7) “United States government-sponsored agency” means an agency originally established or chartered by the United States government to serve public purposes specified by the United States Congress but whose obligations are not explicitly guaranteed by the full faith and credit of the United States government. The term includes the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Farm Credit System, the Federal Home Loan Bank System, the Student Loan Marketing Association, and any successor agency. (8) “Vaccine” means a preparation or suspension of dead, live attenuated, or live fully virulent viruses or bacteria, or of antigenic proteins derived from them, used to prevent, ameliorate, or treat an infectious disease. (q) A taxable entity shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), all revenue received that is directly derived from the operation of a facility that is: (1) located on property owned or leased by the federal government; and (2) managed or operated primarily to house members of the armed forces of the United States. (r) A taxable entity shall exclude, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), total revenue received from oil or gas produced, during the dates certified by the comptroller pursuant to Subsection (s), from: (1) an oil well designated by the Railroad Commission of Texas or similar authority of another state whose production averages less than 10 barrels a day over a 90-day period; and (2) a gas well designated by the Railroad Commission of Texas or similar authority of another state whose production averages less than 250 mcf a day over a 90-day period. (s) The comptroller shall certify dates during which the monthly average closing price of West Texas Intermediate crude oil is below $40 per barrel and the average closing price of gas is below $5 per MMBtu, as recorded on the New York Mercantile Exchange (NYMEX). (t) The comptroller shall adopt rules as necessary to accomplish the legislative intent prescribed by this section. (u) A taxable entity shall exclude from its total revenue the actual cost paid by the taxable entity for a vaccine. (v) A taxable entity primarily engaged in the business of transporting goods by waterways that does not subtract cost of goods sold in computing its taxable margin shall exclude from its total revenue direct costs of providing transportation services by intrastate or interstate waterways to the same extent that a taxable entity that sells in the ordinary course of business real or tangible personal property would be authorized by Section 171.1012 to subtract those costs as costs of goods sold in computing its taxable margin, notwithstanding Section 171.1012(e)(3). © 2017 Thomson Reuters. No claim to original U.S. Government Works. 11 § 171.1011. Determination of Total Revenue from Entire Business, TX TAX § 171.1011 (w-1) A taxable entity primarily engaged in the business of providing services as an agricultural aircraft operation, as defined by 14 C.F.R. Section 137.3, shall exclude from its total revenue the cost of labor, equipment, fuel, and materials used in providing those services. (x) A taxable entity that is registered as a motor carrier under Chapter 643, Transportation Code, shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), flow-through revenue derived from taxes and fees. Credits Added by Acts 2006, 79th Leg., 3rd C.S., ch. 1, § 5, eff. Jan. 1, 2008. Amended by Acts 2007, 80th Leg., ch. 1282, §§ 12, 13, 37(2), eff. Jan. 1, 2008; Acts 2009, 81st Leg., ch. 1360, § 3(a), eff. Jan. 1, 2010; Acts 2011, 82nd Leg., 1st C.S., ch. 4 (S.B. 1), § 45.03, eff. Jan. 1, 2012; Acts 2013, 83rd Leg., ch. 117 (S.B. 1286), § 25, eff. Sept. 1, 2013; Acts 2013, 83rd Leg., ch. 1006 (H.B. 2451), § 1, eff. Jan. 1, 2014; Acts 2013, 83rd Leg., ch. 1034 (H.B. 2766), § 1, eff. Jan. 1, 2014; Acts 2013, 83rd Leg., ch. 1232 (H.B. 500), §§ 7, 8, eff. Jan. 1, 2014; Acts 2017, 85th Leg., ch. 703 (H.B. 3254), § 1, eff. Jan. 1, 2018. Notes of Decisions (9) Footnotes 1 V.T.C.A., Labor Code § 401.001 et seq. V. T. C. A., Tax Code § 171.1011, TX TAX § 171.1011 Current through the end of the 2017 Regular and First Called Sessions of the 85th Legislature End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 12 APPENDIX D-2 § 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012 KeyCite Yellow Flag - Negative Treatment Proposed Legislation Vernon's Texas Statutes and Codes Annotated Tax Code (Refs & Annos) Title 2. State Taxation (Refs & Annos) Subtitle F. Franchise Tax (Refs & Annos) Chapter 171. Franchise Tax (Refs & Annos) Subchapter C. Determination of Taxable Margin; Allocation and Apportionment V.T.C.A., Tax Code § 171.1012 § 171.1012. Determination of Cost of Goods Sold Effective: September 1, 2017 Currentness (a) In this section: (1) “Goods” means real or tangible personal property sold in the ordinary course of business of a taxable entity. (2) “Production” means construction, manufacture, development, mining, extraction, improvement, creation, raising, or growth. (3)(A) “Tangible personal property” means: (i) personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner; (ii) films, sound recordings, videotapes, live and prerecorded television and radio programs, books, and other similar property embodying words, ideas, concepts, images, or sound, without regard to the means or methods of distribution or the medium in which the property is embodied, for which, as costs are incurred in producing the property, it is intended or is reasonably likely that any medium in which the property is embodied will be mass- distributed by the creator or any one or more third parties in a form that is not substantially altered; and (iii) a computer program, as defined by Section 151.0031. (B) “Tangible personal property” does not include: (i) intangible property; or (ii) services. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 1 § 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012 (b) Subject to Section 171.1014, a taxable entity that elects to subtract cost of goods sold for the purpose of computing its taxable margin shall determine the amount of that cost of goods sold as provided by this section. (c) The cost of goods sold includes all direct costs of acquiring or producing the goods, including: (1) labor costs; (2) cost of materials that are an integral part of specific property produced; (3) cost of materials that are consumed in the ordinary course of performing production activities; (4) handling costs, including costs attributable to processing, assembling, repackaging, and inbound transportation costs; (5) storage costs, including the costs of carrying, storing, or warehousing property, subject to Subsection (e); (6) depreciation, depletion, and amortization, reported on the federal income tax return on which the report under this chapter is based, to the extent associated with and necessary for the production of goods, including recovery described by Section 197, Internal Revenue Code; (7) the cost of renting or leasing equipment, facilities, or real property directly used for the production of the goods, including pollution control equipment and intangible drilling and dry hole costs; (8) the cost of repairing and maintaining equipment, facilities, or real property directly used for the production of the goods, including pollution control devices; (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; (10) geological and geophysical costs incurred to identify and locate property that has the potential to produce minerals; (11) taxes paid in relation to acquiring or producing any material, or taxes paid in relation to services that are a direct cost of production; (12) the cost of producing or acquiring electricity sold; and © 2017 Thomson Reuters. No claim to original U.S. Government Works. 2 § 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012 (13) a contribution to a partnership in which the taxable entity owns an interest that is used to fund activities, the costs of which would otherwise be treated as cost of goods sold of the partnership, but only to the extent that those costs are related to goods distributed to the taxable entity as goods-in-kind in the ordinary course of production activities rather than being sold. (d) In addition to the amounts includable under Subsection (c), the cost of goods sold includes the following costs in relation to the taxable entity's goods: (1) deterioration of the goods; (2) obsolescence of the goods; (3) spoilage and abandonment, including the costs of rework labor, reclamation, and scrap; (4) if the property is held for future production, preproduction direct costs allocable to the property, including costs of purchasing the goods and of storage and handling the goods, as provided by Subsections (c)(4) and (c)(5); (5) postproduction direct costs allocable to the property, including storage and handling costs, as provided by Subsections (c)(4) and (c)(5); (6) the cost of insurance on a plant or a facility, machinery, equipment, or materials directly used in the production of the goods; (7) the cost of insurance on the produced goods; (8) the cost of utilities, including electricity, gas, and water, directly used in the production of the goods; (9) the costs of quality control, including replacement of defective components pursuant to standard warranty policies, inspection directly allocable to the production of the goods, and repairs and maintenance of goods; and (10) licensing or franchise costs, including fees incurred in securing the contractual right to use a trademark, corporate plan, manufacturing procedure, special recipe, or other similar right directly associated with the goods produced. (e) The cost of goods sold does not include the following costs in relation to the taxable entity's goods: (1) the cost of renting or leasing equipment, facilities, or real property that is not used for the production of the goods; (2) selling costs, including employee expenses related to sales; © 2017 Thomson Reuters. No claim to original U.S. Government Works. 3 § 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012 (3) distribution costs, including outbound transportation costs; (4) advertising costs; (5) idle facility expense; (6) rehandling costs; (7) bidding costs, which are the costs incurred in the solicitation of contracts ultimately awarded to the taxable entity; (8) unsuccessful bidding costs, which are the costs incurred in the solicitation of contracts not awarded to the taxable entity; (9) interest, including interest on debt incurred or continued during the production period to finance the production of the goods; (10) income taxes, including local, state, federal, and foreign income taxes, and franchise taxes that are assessed on the taxable entity based on income; (11) strike expenses, including costs associated with hiring employees to replace striking personnel, but not including the wages of the replacement personnel, costs of security, and legal fees associated with settling strikes; (12) officers' compensation; (13) costs of operation of a facility that is: (A) located on property owned or leased by the federal government; and (B) managed or operated primarily to house members of the armed forces of the United States; and (14) any compensation paid to an undocumented worker used for the production of goods. As used in this subdivision: (A) “undocumented worker” means a person who is not lawfully entitled to be present and employed in the United States; and (B) “goods” includes the husbandry of animals, the growing and harvesting of crops, and the severance of timber from realty. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 4 § 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012 (f) A taxable entity may subtract as a cost of goods sold indirect or administrative overhead costs, including all mixed service costs, such as security services, legal services, data processing services, accounting services, personnel operations, and general financial planning and financial management costs, that it can demonstrate are allocable to the acquisition or production of goods, except that the amount subtracted may not exceed four percent of the taxable entity's total indirect or administrative overhead costs, including all mixed service costs. Any costs excluded under Subsection (e) may not be subtracted under this subsection. (g) A taxable entity that is allowed a subtraction by this section for a cost of goods sold and that is subject to Section 263A, 460, or 471, Internal Revenue Code, may capitalize that cost in the same manner and to the same extent that the taxable entity capitalized that cost on its federal income tax return or may expense those costs, except for costs excluded under Subsection (e), or in accordance with Subsections (c), (d), and (f). If the taxable entity elects to capitalize costs, it must capitalize each cost allowed under this section that it capitalized on its federal income tax return. If the taxable entity later elects to begin expensing a cost that may be allowed under this section as a cost of goods sold, the entity may not deduct any cost in ending inventory from a previous report. If the taxable entity elects to expense a cost of goods sold that may be allowed under this section, a cost incurred before the first day of the period on which the report is based may not be subtracted as a cost of goods sold. If the taxable entity elects to expense a cost of goods sold and later elects to capitalize that cost of goods sold, a cost expensed on a previous report may not be capitalized. (h) A taxable entity shall determine its cost of goods sold, except as otherwise provided by this section, in accordance with the methods used on the federal income tax return on which the report under this chapter is based. This subsection does not affect the type or category of cost of goods sold that may be subtracted under this section. (i) A taxable entity may make a subtraction under this section in relation to the cost of goods sold only if that entity owns the goods. The determination of whether a taxable entity is an owner is based on all of the facts and circumstances, including the various benefits and burdens of ownership vested with the taxable entity. A taxable entity furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance (as the term “maintenance” is defined in 34 T.A.C. Section 3.357) of real property is considered to be an owner of that labor or materials and may include the costs, as allowed by this section, in the computation of cost of goods sold. Solely for purposes of this section, a taxable entity shall be treated as the owner of goods being manufactured or produced by the entity under a contract with the federal government, including any subcontracts that support a contract with the federal government, notwithstanding that the Federal Acquisition Regulation may require that title or risk of loss with respect to those goods be transferred to the federal government before the manufacture or production of those goods is complete. (j) A taxable entity may not make a subtraction under this section for cost of goods sold to the extent the cost of goods sold was funded by partner contributions and deducted under Subsection (c)(13). (k) Notwithstanding any other provision of this section, if the taxable entity is a lending institution that offers loans to the public and elects to subtract cost of goods sold, the entity, other than an entity primarily engaged in an activity described by category 5932 of the 1987 Standard Industrial Classification Manual published by the federal Office of Management and Budget, may subtract as a cost of goods sold an amount equal to interest expense. For purposes of this subsection, an entity engaged in lending to unrelated parties solely for agricultural production offers loans to the public. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 5 § 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012 (k-1) Notwithstanding any other provision of this section, the following taxable entities may subtract as a cost of goods sold the costs otherwise allowed by this section in relation to tangible personal property that the entity rents or leases in the ordinary course of business of the entity: (1) a motor vehicle rental or leasing company that remits a tax on gross receipts imposed under Section 152.026; (2) a heavy construction equipment rental or leasing company; and (3) a railcar rolling stock rental or leasing company. (k-2) This subsection applies only to a pipeline entity: (1) that owns or leases and operates the pipeline by which the product is transported for others and only to that portion of the product to which the entity does not own title; and (2) that is primarily engaged in gathering, storing, transporting, or processing crude oil, including finished petroleum products, natural gas, condensate, and natural gas liquids, except for a refinery installation that manufactures finished petroleum products from crude oil. Notwithstanding Subsection (e)(3) or (i), a pipeline entity providing services for others related to the product that the pipeline does not own and to which this subsection applies may subtract as a cost of goods sold its depreciation, operations, and maintenance costs allowed by this section related to the services provided. (k-3) For purposes of Subsection (k-2), “processing” means the physical or mechanical removal, separation, or treatment of crude oil, including finished petroleum products, natural gas, condensate, and natural gas liquids after those materials are produced from the earth. The term does not include the chemical or biological transformation of those materials. (l) Notwithstanding any other provision of this section, a payment made by one member of an affiliated group to another member of that affiliated group not included in the combined group may be subtracted as a cost of goods sold only if it is a transaction made at arm's length. (m) In this section, “arm's length” means the standard of conduct under which entities that are not related parties and that have substantially equal bargaining power, each acting in its own interest, would negotiate or carry out a particular transaction. (n) In this section, “related party” means a person, corporation, or other entity, including an entity that is treated as a pass-through or disregarded entity for purposes of federal taxation, whether the person, corporation, or entity is subject to the tax under this chapter or not, in which one person, corporation, or entity, or set of related persons, corporations, or entities, directly or indirectly owns or controls a controlling interest in another entity. (o) If a taxable entity, including a taxable entity with respect to which cost of goods sold is determined pursuant to Section 171.1014(e)(1), 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. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 6 § 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012 (p) to (s) [Blank]. (t) 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. Credits Added by Acts 2006, 79th Leg., 3rd C.S., ch. 1, § 5, eff. Jan. 1, 2008. Amended by Acts 2007, 80th Leg., ch. 1282, §§ 14, 15, eff. Jan. 1, 2008; Acts 2013, 83rd Leg., ch. 1232 (H.B. 500), § 9, eff. Jan. 1, 2014; Acts 2013, 83rd Leg., ch. 1232 (H.B. 500), § 10(a), eff. Sept. 1, 2013; Acts 2017, 85th Leg., ch. 377 (H.B. 4002), § 1, eff. Sept. 1, 2017. Notes of Decisions (12) V. T. C. A., Tax Code § 171.1012, TX TAX § 171.1012 Current through the end of the 2017 Regular and First Called Sessions of the 85th Legislature End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 7 APPENDIX D-3 § 53.001. Definitions, TX PROPERTY § 53.001 KeyCite Yellow Flag - Negative Treatment Proposed Legislation Vernon's Texas Statutes and Codes Annotated Property Code (Refs & Annos) Title 5. Exempt Property and Liens Subtitle B. Liens Chapter 53. Mechanic's, Contractor's, or Materialman's Lien (Refs & Annos) Subchapter A. General Provisions V.T.C.A., Property Code § 53.001 § 53.001. Definitions Currentness In this chapter: (1) “Contract price” means the cost to the owner for any part of construction or repair performed under an original contract. (2) “Improvement” includes: (A) abutting sidewalks and streets and utilities in or on those sidewalks and streets; (B) clearing, grubbing, draining, or fencing of land; (C) wells, cisterns, tanks, reservoirs, or artificial lakes or pools made for supplying or storing water; (D) pumps, siphons, and windmills or other machinery or apparatuses used for raising water for stock, domestic use, or irrigation; and (E) planting orchard trees, grubbing out orchards and replacing trees, and pruning of orchard trees. (3) “Labor” means labor used in the direct prosecution of the work. (4) “Material” means all or part of: (A) the material, machinery, fixtures, or tools incorporated into the work, consumed in the direct prosecution of the work, or ordered and delivered for incorporation or consumption; © 2017 Thomson Reuters. No claim to original U.S. Government Works. 1 § 53.001. Definitions, TX PROPERTY § 53.001 (B) rent at a reasonable rate and actual running repairs at a reasonable cost for construction equipment used or reasonably required and delivered for use in the direct prosecution of the work at the site of the construction or repair; or (C) power, water, fuel, and lubricants consumed or ordered and delivered for consumption in the direct prosecution of the work. (5) “Mechanic's lien” means the lien provided by this chapter. (6) “Original contract” means an agreement to which an owner is a party either directly or by implication of law. (7) “Original contractor” means a person contracting with an owner either directly or through the owner's agent. (8) “Residence” means a single-family house, duplex, triplex, or quadruplex or a unit in a multiunit structure used for residential purposes that is: (A) owned by one or more adult persons; and (B) used or intended to be used as a dwelling by one of the owners. (9) “Residential construction contract” means a contract between an owner and a contractor in which the contractor agrees to construct or repair the owner's residence, including improvements appurtenant to the residence. (10) “Residential construction project” means a project for the construction or repair of a new or existing residence, including improvements appurtenant to the residence, as provided by a residential construction contract. (11) “Retainage” means an amount representing part of a contract payment that is not required to be paid to the claimant within the month following the month in which labor is performed, material is furnished, or specially fabricated material is delivered. The term does not include retainage under Subchapter E. 1 (12) “Specially fabricated material” means material fabricated for use as a component of the construction or repair so as to be reasonably unsuitable for use elsewhere. (13) “Subcontractor” means a person who has furnished labor or materials to fulfill an obligation to an original contractor or to a subcontractor to perform all or part of the work required by an original contract. (14) “Work” means any part of construction or repair performed under an original contract. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 2 § 53.001. Definitions, TX PROPERTY § 53.001 (15) “Completion” of an original contract means the actual completion of the work, including any extras or change orders reasonably required or contemplated under the original contract, other than warranty work or replacement or repair of the work performed under the contract. Credits Acts 1983, 68th Leg., p. 3533, ch. 576, § 1, eff. Jan. 1, 1984. Amended by Acts 1997, 75th Leg., ch. 526, § 2, eff. Sept. 1, 1997; Acts 1999, 76th Leg., ch. 889, § 1, eff. Sept. 1, 1999. Editors' Notes REVISOR'S NOTE 2014 Main Volume (1) The revised law omits the source law provision that materials qualify as specially fabricated even if not delivered because the provision is unnecessary as part of the definition. The provision has the substantive effect of making the mechanic's lien attach even if the material is not delivered, and that is expressly provided for in Section 53.021(b). (2) The revised law adds the definition of “mechanic's lien” for drafting convenience. Notes of Decisions (47) Footnotes 1 V.T.C.A., Property Code § 53.101 et seq. V. T. C. A., Property Code § 53.001, TX PROPERTY § 53.001 Current through the end of the 2017 Regular and First Called Sessions of the 85th Legislature End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 3 APPENDIX D-4 § 53.021. Persons Entitled to Lien, TX PROPERTY § 53.021 KeyCite Yellow Flag - Negative Treatment Proposed Legislation Vernon's Texas Statutes and Codes Annotated Property Code (Refs & Annos) Title 5. Exempt Property and Liens Subtitle B. Liens Chapter 53. Mechanic's, Contractor's, or Materialman's Lien (Refs & Annos) Subchapter B. Persons Entitled to Lien; Subject Property (Refs & Annos) V.T.C.A., Property Code § 53.021 § 53.021. Persons Entitled to Lien Effective: September 1, 2003 Currentness (a) A person has a lien if: (1) the person labors, specially fabricates material, or furnishes labor or materials for construction or repair in this state of: (A) a house, building, or improvement; (B) a levee or embankment to be erected for the reclamation of overflow land along a river or creek; or (C) a railroad; and (2) the person labors, specially fabricates the material, or furnishes the labor or materials under or by virtue of a contract with the owner or the owner's agent, trustee, receiver, contractor, or subcontractor. (b) A person who specially fabricates material has a lien even if the material is not delivered. (c) An architect, engineer, or surveyor who prepares a plan or plat under or by virtue of a written contract with the owner or the owner's agent, trustee, or receiver in connection with the actual or proposed design, construction, or repair of improvements on real property or the location of the boundaries of real property has a lien on the property. (d) A person who provides labor, plant material, or other supplies for the installation of landscaping for a house, building, or improvement, including the construction of a retention pond, retaining wall, berm, irrigation system, fountain, or other similar installation, under or by virtue of a written contract with the owner or the owner's agent, contractor, subcontractor, trustee, or receiver has a lien on the property. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 1 § 53.021. Persons Entitled to Lien, TX PROPERTY § 53.021 (e) A person who performs labor as part of, or who furnishes labor or materials for, the demolition of a structure on real property under or by virtue of a written contract with the owner of the property or the owner's agent, trustee, receiver, contractor, or subcontractor has a lien on the property. Credits Acts 1983, 68th Leg., p. 3535, ch. 576, § 1, eff. Jan. 1, 1984. Amended by Acts 1989, 71st Leg., ch. 395, § 1, eff. Sept. 1, 1989; Acts 1989, 71st Leg., ch. 1138, § 1, eff. Sept. 1, 1989; Acts 1991, 72nd Leg., ch. 16, § 16.01, eff. Aug. 26, 1991; Acts 1995, 74th Leg., ch. 851, §§ 1, 6, eff. Sept. 1, 1995; Acts 1999, 76th Leg., ch. 896, § 1, eff. Sept. 1, 1999; Acts 2003, 78th Leg., ch. 410, § 1, eff. Sept. 1, 2003; Acts 2011, 82nd Leg., ch. 271 (H.B. 1456), § 1, eff. Jan. 1, 2012. Editors' Notes REVISOR'S NOTE 2014 Main Volume The revised law omits the references to a “firm” and a “corporation” because those entities are included in the definition of “person” under the Code Construction Act (V.A.C.S. Article 5429b-2). Notes of Decisions (143) V. T. C. A., Property Code § 53.021, TX PROPERTY § 53.021 Current through the end of the 2017 Regular and First Called Sessions of the 85th Legislature End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 2 APPENDIX D-5 § 53.023. Payment Secured by Lien, TX PROPERTY § 53.023 KeyCite Yellow Flag - Negative Treatment Proposed Legislation Vernon's Texas Statutes and Codes Annotated Property Code (Refs & Annos) Title 5. Exempt Property and Liens Subtitle B. Liens Chapter 53. Mechanic's, Contractor's, or Materialman's Lien (Refs & Annos) Subchapter B. Persons Entitled to Lien; Subject Property (Refs & Annos) V.T.C.A., Property Code § 53.023 § 53.023. Payment Secured by Lien Currentness The lien secures payment for: (1) the labor done or material furnished for the construction or repair; (2) the specially fabricated material, even if the material has not been delivered or incorporated into the construction or repair, less its fair salvage value; or (3) the preparation of a plan or plat by an architect, engineer, or surveyor in accordance with Section 53.021(c). Credits Acts 1983, 68th Leg., p. 3536, ch. 576, § 1, eff. Jan. 1, 1984. Amended by Acts 1995, 74th Leg., ch. 851, § 2, eff. Sept. 1, 1995. Notes of Decisions (3) V. T. C. A., Property Code § 53.023, TX PROPERTY § 53.023 Current through the end of the 2017 Regular and First Called Sessions of the 85th Legislature End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works. © 2017 Thomson Reuters. No claim to original U.S. Government Works. 1