American Multi-Cinema, Inc.// Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas// Cross-Appellee, American Multi-Cinema, Inc.

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ACCEPTED 03-14-00397-CV 3783530 THIRD COURT OF APPEALS AUSTIN, TEXAS 1/15/2015 2:05:58 PM JEFFREY D. KYLE CLERK No. 03-14-00397-CV FILED IN 3rd COURT OF APPEALS 3Jn tbe QCourt of §ppeals AUSTIN, TEXAS for tbe Z!rbirb 31 ubicial 119istrirt 1/15/2015 2:05:58 PM JEFFREY D. KYLE §ustin, Z!rexas Clerk American Multi-Cinema, Inc., Appellant/Cross-Appellee, v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas, Appellees/Cross-Appellants. On Appeal from the 200th Judicial District Court Travis County, Texas Cross-Appellants' Reply Brief KEN PAXTON CHARLES K. ELDRED Attorney General of Texas State Bar No. 00793681 Assistant Attorney General CHARLES E. ROY Financial Litigation, Tax, and First Assistant Attorney General Charitable Trusts Division P.O. Box 12548 JAMES E. DA VIS Austin, Texas 78711-2548 Deputy Attorney General for Civil Litigation 512-475-1743 512-477-2348 (fax) ROBERT O'KEEFE charles.eldred@texasattorneygeneral.gov Division Chief Financial Litigation, Tax, and Attorneys for Cross-Appellants Charitable Trusts Division Oral Argument Requested Table of Contents Index of Authorities .................................................................................................. ii Argu111ent .................................................................................................................... 1 1. AMC sells a license when it exhibits movies. A license is intangible property, which is excluded from the definition of goods. Therefore, the district court erred by finding that AMC sells "goods" when it ex- hibits inovies .................................................................................................... 3 2. A movie experience, whether characterized as ideas, images, sounds, memories, or otherwise, is not property. Therefore, it is not a "good" under the franchise tax ..................................................................................... 4 3. AMC's movie exhibitions are also services, and therefore not "goods" under the franchise tax ..................................................................................... 6 4. The district court correctly found that AMC does not produce "goods" defined by Tex. Tax Code § 171.1012(a)(3)(A)(ii) for sale ............................. 7 5. The 2007 amendment has no effect on the resolution of this appeal. ............. 9 6. The 2013 amendment has no effect on the resolution of this appeal. .......... 10 7. The evidence is legally insufficient to support the trial court's finding that AMC is entitled to include its exhibition costs in its cost-of- goods-sold deduction .................................................................................... 15 Conclusion ............................................................................................................... 17 Certificate of Co111pliance ....................................................................................... 18 Certificate of Service ............................................................................................... 18 Cross-Appellants' Reply Brief- Page i American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV Index of Authorities Cases Calvert v. General Asphalt Co., 409 S.W.2d 935 (Tex. Civ. App.-Austin 1966, no writ) ..................... 11, 12 Combs v. Newpark Res., Inc., 422 S.W.3d 46 (Tex. App.-Austin 2013, no pet.) ........................................ 6 Public Utility Comm 'n of Texas v. City ofHarlingen, 311 S.W.3d 610 (Tex. App.-Austin 2010, no pet.) .............................. 14, 15 Rowan Oil Co. v. Texas Employment Comm 'n, 152 Tex. 607, 263 S.W.2d 140 (1953) ......................................................... 11 State v. Fidelity and Deposit Co. of Maryland, 223 S.W.3d 309 (Tex. 2007) .................................................................. 11, 13 Strayhorn v. Willow Creek Res., Inc., 161 S.W.3d 716 (Tex. App.-Austin 2005, no pet.) .................................... 12 Texas Health Ins. Risk Pool v. Southwest Service Life Ins. Co., 272 S.W.3d 797 (Tex. App.-Austin 2008, no pet.) .................................... 13 Tijerina v. City of Tyler, 846 S.W.2d 825 (Tex. 1992) ....................................................................... 12 Waste Management a/Texas, Inc. v. Texas Disposal Systems Landfill, Inc., 2012 WL 1810215 (Tex. App.-Austin May 18, 2012), aff'd in part, rev 'din part on other grounds, 434 S.W.3d 142 (Tex. 2014) ............... 13, 14 Williamson Pointe Venture v. City of Austin, 912 S.W.2d 340 (Tex. App.-Austin 1995, no writ) ............................. 12, 13 Cross-Appellants' Reply Brief - Page ii American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV Statutes TEX. TAX CODE§ 171. l 012 .............................................................................. passim TEX. TAX CODE§ 171. l 012(a) ................................................................................... 2 TEX. TAX CODE §171.1012(a)(3)(A)(i) ..................................................... 2, 4, 5, 6, 7 TEX. TAX CODE § 171. l 012(a)(3)(A)(ii) ........................................................ 2, 7, 8, 9 TEX. TAX CODE§ 171. l 012(a)(3)(A)(iii) ................................................................... 2 TEX. TAX CODE§ 171. l 012(a)(3)(B)(i) ..................................................................... 2 TEX. TAX CODE§ 171. l 012(a)(3)(B)(ii) .................................................................... 2 TEX. TAX CODE §l 71.1012(c) ................................................................................... 2 Other Authorities Act of May 26, 2007, 80th Leg., R.S., ch, 1282, § 14, 2007 Tex. Gen. Laws 4282 (codified as Tex. Tax Code§ l 71.1012(a)(3)(A)(ii) ........................... 10 Act of May 27, 2013, 83rd Leg., R.S., ch, 1232, § 10, 2013 Tex. Gen. Laws 3104 (codified as Tex. Tax Code§ 171.1012(t)) ................. 10, 11, 12, 13, 15 Cross-Appellants' Reply Brief- Page iii American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV No. 03-14-00397-CV Jf n tbe QCourt of ~ppeals for tlJe W:birb 3J ubicial 11Bistrict ~ttstin, W:exas American Multi-Cinema, Inc., Appellant/Cross-Appellee, v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas, Appellees/Cross-Appellants. On Appeal from the 200th Judicial District Court Travis County, Texas Cross-Appellants' Reply Brief To THE HONORABLE THIRD COURT OF APPEALS: The question in this appeal is whether AMC sells goods when it exhibits a movie. The answer is no. Because a movie-goer does not own any good as a result of watching a movie, it necessarily follows that AMC does not sell its movie-goers goods when it exhibits a movie. Consequently, the trial court erred by ruling that AMC may include its exhibition costs (such as the costs of renting films from stud- ies and the costs of operating auditoriums) in its cost-of-goods-sold deduction. Cross-Appellants' Reply Brief- Page I American Multi-Cinema, Inc. v. 1-Jegar, et al.; 03-14-00397-CV The undisputed material facts of this appeal are simple and common knowledge. The question is how the franchise tax applies to those facts. The cost of goods sold includes all direct costs of acquiring or producing the goods. TEX. TAX CODE§ 171.1012(c) (West 2008). "Goods" means real or tangible personal property sold in the ordinary course of business of a taxable entity. TEX. TAX CODE § 171.1012( a). The franchise tax defines "tangible personal property" as: • personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner(§ l 71.1012(a)(3)(A)(i)); • films, sound recordings, videotapes, live and prerecorded television and radio programs, books, and other similar property embodying words, ideas, con- cepts, images, or sound, without regard to the means or methods of distribu- tion 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(§ l 71.1012(a)(3)(A)(ii)); and • computer programs(§ 171.1012(a)(3)(A)(iii)). But "tangible personal property" does not include: • services (§ 171.1012(a)(3)(B)(i)); or • intangible property(§ l 71.1012(a)(3)(B)(ii)). For franchise tax purposes, AMC's movie exhibitions can be characterized in many ways. But there is no characterization under which AMC produces goods for sale when it exhibits movies. The Court should reverse the district court's cost- of-goods-sold ruling and render a judgment in favor of the Comptroller. Cross-Appellants' Reply Brief- Page 2 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV 1. AMC sells a license when it exhibits movies. A license is intangible property, which is excluded from the definition of goods. There- fore, the district court erred by finding that AMC sells "goods" when it exhibits movies. Other than concessions, the only thing that movie-goers purchase, and thus the only thing that AMC sells, is a revocable license to view a movie at a particular time and place. The license allows a movie-goer entry into an auditorium while the movie is playing. It is illegal for someone to be in an AMC auditorium at a time and place other than the time and place on the movie ticket. A license is intangible property, and therefore not a good under the franchise tax. Because AMC's prod- uct for sale is a license, AMC may not include exhibition costs in its cost-of-goods- sold deduction. AMC does not disagree that a license is intangible property. Cross- Appellee's brief at 25. Instead, AMC argues that its customers purchase both a li- cense to be in the auditorium to watch the movie and the movie experience itself. "AMC's customers purchase movie tickets that tell AMC theatre operators that the customers are permitted to be on the property to consume the film's sight and sound at a particular time. Nevertheless, the customers are purchasing the sight and sound, not permission to enter the theatre." Cross-Appellee's Brief at 26-27 (cita- tion to record omitted). AMC compares its customers to people buying tickets to a Cross-Appellants' Reply Brief- Page 3 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV food and wine festival. The ticket allows them both to attend the festival and to consume food and wine at the festival. Cross-Appellee's Brief at 26. But this comparison either supports the Comptroller's position or is inapt. If the festival-goers purchase food and wine separately from the ticket, then the festi- val ticket is merely a license to attend the festival, just as a movie ticket is a license to attend a movie exhibition. If the festival ticket includes a certain amount of food and wine in the purchase price, then the festival-goer is buying food and wine, which are goods under the franchise tax ("personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner." Tex. Tax Code§ 171.1012(a)(3)(A)(i). In contrast, a movie experience is not property at all. See infra part 2. If a movie-goer is characterized as purchasing both a license to be present in an auditorium at a certain time and a movie experi- ence, then the movie-goer is purchasing (and AMC is selling) intangible property (the license) and non-property (the experience). Neither are "goods" under the franchise tax, so AMC's exhibition costs are not cost-of-goods-sold. 2. A movie experience, whether characterized as ideas, images, sounds, memories, or otherwise, is not property. Therefore, it is not a "good" under the franchise tax. A movie experience, like other life experiences, is not property. Property is separate from the person. Experiences are part of the person. More to the point, experiences are not tangible personal property or goods under the franchise tax, Cross-Appellants' Reply Brief- Page 4 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV and selling an experience is not selling personal property. Just as thrill-ride opera- tors and symphonies sell experiences that can be detected with the senses but are not goods or personal property, AMC sells an experience that can be detected with the senses but is not personal property. Consequently, if AMC's business is charac- terized as selling a movie experience, it is not selling ''personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner [emphasis added]." Tex. Tax Code§ 171.1012(a)(3)(A)(i). The district court erred in finding otherwise. AMC argues that its movie experience is "necessarily owned for a limited period of time before it is consumed." Cross-Appellee's Brief at 31. But of course there never is a time delay or "limited period of time" between the picture appear- ing on the screen and the customer experiencing the movie in the seat. A movie experience is not "owned for a limited period of time before it is consumed." If it were, then a person could exercise property rights over it (such as transferring or selling it to someone else, or taking it home) during that limited time period of ownership before consumption. But of course that is impossible. The movie expe- rience immediately becomes paii of the person-like other experiences. AMC disagrees with the Comptroller's assertion that AMC sells memories. Instead, AMC argues that memories are just a side effect of the movie experience. "[T]hough AMC's customers may leave its theatres with memories of the film, Cross-Appellants' Reply Brief- Page 5 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV AMC's products are not memories or other such metaphysical attributes." Cross- Appellee's Brief at 27. But whether or not AMC sells memories, neither memories nor movie experiences are personal prope1iy, and thus they are not "goods" under Tex. Tax Code§ l 71.1012(a)(3)(A)(i). Furthermore, if a movie-exhibition service can be characterized as an expe- rience which is also personal property, then that violates the statutory exclusion of services from the definition of personal property because every service is experi- enced. That cannot be right. 3. AMC movie exhibitions are also services, and therefore not "goods" under the franchise tax. As the Comptroller explained in its Brief, AMC could also be said to sell a service when it sells movie tickets. Services are excluded from the definition of "goods" in the franchise tax statute. "Services" means "the performance of work commanded or paid for by another" or "useful labor that does not produce a tangi- ble commodity." Combs v. Newpark Res., Inc., 422 S.W.3d 46, 54 n.8 (Tex. App.-Austin 2013, no pet.). Those definitions perfectly fit movie exhibition. It takes work to exhibit a movie, and AMC described this work in great detail at trial. l.SRR.37-66 (March 5, 2014 trial) (testimony of Robert Huerta). And the exhibi- tion of a movie does not produce a tangible commodity. Instead, as AMC acknowledges, it produces "images and sounds stored in [the] brain." Cross- Appellee's Brief at 26 n. 10. Cross-Appellants' Reply Brief - Page 6 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV AMC's only response to this argument is that its witnesses testified that AMC does not sell services. Cross-Appellee's Brief at 6, 34. But this testimony is merely a legal argument about the legal issue-not evidence. The Court makes the legal determination of whether the statute is satisfied, not the witnesses. 4. The district court correctly found that AMC does not produce "goods" defined by Tex. Tax Code §171.1012(a)(3)(A)(ii) for sale. In addition to arguing that it produces "personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner" for sale under Tex. Tax Code § 171.1012(a)(3)(A)(i), AMC also argued that it produces property described by Tex. Tax Code § 171.1012(a)(3)(A)(ii) for sale. CR.6 at i!l 1 (original petition for Report Year 2008, alleging that AMC pro- duces films for sale); 2.SCR.5 at ill I (same for Report Year 2009); CR.68, 74-77 (AMC's trial brief). AMC requested that the district court make the following con- clusion of law: "When AMC's customers purchase movie tickets and experience the content of a film, they buy 'tangible personal property' as defined in Tax Code § 171.1012(a)(3)(A)(ii)." CR.464. But the district court failed to include either a finding of fact or a conclusion of law showing that AMC prevailed on its theory under § 171.10 l 2(a)(3)(A)(ii). 2.SCR.30. Nonetheless, on appeal, AMC argues that§ 171.1012(a)(3)(A)(ii) is an alternative basis to uphold the judgment below. Cross-Appellee's Brief at 13-14. Cross-Appellants' Reply Brief- Page 7 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV In fact, AMC does not produce "goods" under§ 171.1012(a)(3)(A)(ii) for sale. That subsection applies to producers and creators of films that are intended to be mass-distributed. Film-makers may deduct the cost of making those films as costs of goods sold. But AMC does not make films. AMC exhibits films that others have made. AMC does not make§ l 71.1012(a)(3)(A)(ii) goods. Tex. Tax Code § 171.1012(a)(3)(A)(ii) defines the following as tangible per- sonal property (and therefore "goods"): 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 em- bodied, for which, as costs are incurred in producing the property, it is intended or is reasonably likely that any medium in which the proper- ty is embodied will be mass-distributed by the creator or any one or more third parties in a form that is not substantially altered Thus, for AMC to take advantage of this provision, it must produce the fol- lowing for sale: (1) films (2) without regard to the means or methods of distribution or the medium in which the films are embodied (3) as costs are incurred in producing the films, it is intended or is reason- ably likely that any medium in which the films are embodied will be mass-distributed (4) in a form that is not substantially altered Cross-Appellants' Reply Brief- Page 8 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV This allows a movie-maker who makes a movie in Texas to include the costs of making the movie in its cost-of-goods-sold, no matter if the movie is to be shown in theaters, on television, on DVD or Blu-ray, on an internet streaming ser- vice, or any other distribution channel. In contrast to a movie-maker or producer, AMC does not produce "goods" under§ 171.1012(a)(3)(A)(ii). AMC does not produce films at all. AMC exhibits films that others have produced or created. The films are embodied in 35- millimeter celluloid film, which AMC rents from film distributors and does not sell. AMC does not distribute 35-millimeter films; to the contrary, it is the end- user. It occupies a different place in the movie business than movie-makers. It re- ceives (1) films (2) in 35-millimeter format (3) that have been mass-distributed (4) in a form that AMC may not alter (as explained in Cross-Appellants' Brief at 3). The film is a finished product before AMC rents and exhibits it. Tex. Tax Code § 171.1012(a)(3)(A)(ii) simply does not apply to movie exhibition. 5. The 2007 amendment has no effect on the resolution of this appeal. AMC argues that a 2007 amendment to the franchise tax statute means that "the films sold by movie theatres [are] to be treated as 'tangible personal property' for the purposes of [cost of goods sold]." Cross-Appellee's Brief at 17. But, again, AMC does not sell movies, so even if it describes the amendment correctly, the amendment does not help its argument. Cross-Appellants' Reply Brief- Page 9 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV But in fact the amendment has nothing to do with this case. The amendment crossed out some language and added some language (in bold below), thus: films, sound recordings, videotapes, live and prerecorded television and radio programs, books, and other similar prope1iy 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, [by the creator of the property] for which, as costs are incurred in producing the property, it is intended or is rea- sonably likely that any [tangible] 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. [Act of May 26, 2007, 80th Leg., R.S., ch. 1282, § 14, 2007 Tex. Gen. Laws 4282, 4290 (App. 1).] The changes mean that ( 1) makers of TV and radio shows are included in the list of those who may take advantage of this provision, and (2) movie-makers may in- elude their costs of making movies as costs of goods sold no matter the medium in which the movie is embodied. Neither of the changes have anything to do with movie exhibition. 6. The 2013 amendment has no effect on the resolution of this appeal. On September 1, 2013, Section 10 of House Bill 500 became effective, add- ing subsection (t) to the cost-of-goods-sold statute. Subsection (t) defines a movie theater's cost of goods sold as "costs described by this section in relation to the ac- quisition, production, exhibition, or use of a film or motion picture, including ex- penses for the right to use the film or motion picture." Act of May 27, 2013, 83rd Leg., R.S., ch. 1232, § 10, 2013 Tex. Gen. Laws 3104, 3108 (App. 2).] Section Cross-Appellants' Reply Brief- Page I 0 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV lO(b) ofHB 500 states, "Section 171.1012(t), Tax Code, as added by this section, is a clarification of existing law and does not imply that existing law may be con- strued as inconsistent with the law as amended by this section." Id. AMC argues that this amendment allows AMC to include its exhibition costs in its cost-of-goods-sold deduction for 2008 and 2009, before the date of this amendment. But AMC is mistaken. The law is not retroactive. It does not purport to amend the governing statute, and purports to permit but not impose any interpre- tation on the governing statute. Thus, Section 1O(b) is not an unconstitutional ret- roactive law, prohibited by Article 1, Section 16 of the Texas Constitution. "A statute is presumed to be prospective in its operation unless expressly made retro- spective." State v. Fidelity and Deposit Co. of Maryland, 223 S.W.3d 309, 311 (Tex. 2007). Section 1O(b) does not expressly state that new subsection (t) is retro- active. Furthermore, by its own terms, H.B. 500 became effective on September 1, 2013 and is to be applied prospectively. "An Act of the Legislature is not operative as notice of its provisions until it becomes effective as a law. It performs no func- ti on whatsoever until its effective date." Calvert v. General Asphalt Co., 409 S.W.2d 935, 938 (Tex. Civ. App.-Austin 1966, no writ). Finally, one legislature may not declare the intent of a past session. Rowan Oil Co. v. Texas Employment Comm 'n, 152 Tex. 607, 263 S.W.2d 140, 144 (1953); Cross-Appellants' Reply Brief- Page 11 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV General Asphalt Co., 409 S.W.2d at 937 ("[O]ne legislature is without authority to construe former enactments of other legislatures."); Strayhorn v. Willow Creek Res., Inc., 161 S.W.3d 716, 722 (Tex. App.-Austin 2005, no pet.) ("[T]he intent or understanding of the 78th Legislature offers no insight into the intent of previ- ous legislatures."). However, "[o]ne legislature's interpretation of a prior legislature's enact- ment may be persuasive but does not control the interpretation of a prior act. And, if the later legislation differs significantly from existing law, the later legislation changes rather than clarifies existing law [internal citation omitted]." Williamson Pointe Venture v. City of Austin, 912 S.W.2d 340, 345 (Tex. App.-Austin 1995, no writ); accord Tijerina v. City of Tyler, 846 S.W.2d 825, 828 (Tex. 1992) ("Without any explanation or suppo1i from the words of the statute or its legislative history, the City argues that this amendment is a 'clarification' of prior versions rather than a change in their substance ... [However,] [t]o read the limitation im- posed by the 1987 amendments into this definition would directly contradict the plain meaning of the prior statutes.") The new subsection (t) changes existing law significantly. The current defi- nition does not allow movie theaters to include movie exhibition costs in their cost- of-goods-sold deduction. The new statute changes the definition of cost of goods sold by creating a new tax exemption for movie theaters. That makes it a substan- Cross-Appellants' Reply Brief- Page 12 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV tive change, rather than a clarification, the language of Section 1O(b) notwithstand- mg. In Williamson Pointe Venture, the Third Comi of Appeals called the later- enacted statute "a broad change rather than a clarification," noting that it changed two definitions and added "a whole section of exclusions to the arguably broader statute." Id. at 345. This is consistent with the Texas Supreme Court's holding that changes to definitions are prospective only. Fidelity and Deposit Co. of Maryland, 223 S.W.3d at 311-12. Similarly, subsection (t) changes the definition of cost of goods sold and adds a specific franchise tax deduction for movie theaters that was not in the previous law. The Court has rejected other arguments that a later-enacted statute merely clarified, as opposed to changed, a prior-enacted statute. Williamson Pointe Ven- ture, supra; Texas Health Ins. Risk Pool v. Southwest Service Life Ins. Co., 272 S.W.3d 797, 805 (Tex. App.-Austin 2008, no pet.) ("Because the amended statute differs significantly from the law as it existed in 2006, we conclude that the 2007 amendments served to change, rather than clarify, the existing law"); Waste Man- agement of Texas, Inc. v. Texas Disposal Systems Landfill, Inc., 2012 WL 1810215, 30 (Tex. App.-Austin May 18, 2012), ajf'd in part, rev'd in part on other grounds, 434 S.W.3d 142 (Tex. 2014) (noting that if later legislation differs Cross-Appellants' Reply Brief- Page 13 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV significantly from existing law, that later legislation changes rather than clarifies existing law). AMC relies on Public Utility Comm 'n of Texas v. City of Harlingen, 311 S.W.3d 610 (Tex. App.-Austin 2010, no pet.), Cross-Appellee's Brief at 21-22, but its reliance is misplaced. In that case, the Court held that the Public Utility Regulatory Act ("PURA") granted the Public Utility Commission statutory au- thority to grant a certificate of convenience and necessity ("CCN") to a transmis- sion-only utility, based on a number of reasons: • First, "The applicable definitions in the PURA contemplate that a util- ity may be a transmission-only utility." Id. at 617. • Second, "[S]ection 39.051 specifically provides that the electric utility 'may create separate transmission and distribution utilities."' Id. at 617n.4. • Third, "Based on the plain language of sections 37.056 and 37.154, each of which provides the Commission authority to approve a utili- ty's receipt of a CCN, the Commission has been given the power to approve a CCN for a utility that provides only transmission services, provided that such services meet the applicable standards." Id. at 617. • Fourth, "[T]here are circumstances in which transmission-only utili- ties are specifically provided for by statute." Id. at 618 n.5. • Fifth and sixth, in response to two different statutory arguments that "because a transmission-only utility, unlike one that also provides dis- tribution services, would generally not have a defined geographic area to which it provided service, such a utility cannot obtain a CCN", the Third Court of Appeals responded that "section 37 .151 does not re- quire a transmission-only utility to have a service area" and "section 37.056 does not support [the] position that a transmission-only utility cannot be certified without a defined service area." Id. at 619. Cross-Appellaiits' Reply Brief- Page 14 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV After making all these points, the Court stated that it would not consider the parties' policy arguments "because the Texas Legislature has spoken to the issue by enacting House Bill 3309 during the 2009 regular session [and] has clarified, therefore, that an electric utility intending to operate a facility that is part of the transmission system serving the ERCOT power region may obtain a CCN even if the utility will provide only transmission services and will not satisfy section 37.151 's certificated-area-related requirements." Public Utility Com 'n of Texas v. City ofHarlingen, 311 S.W.3d at 620. Thus, the opinion only supports that position that a later-enacted law can moot policy arguments. The case did not rely on any language from the later- enacted law to interpret the earlier-enacted law. In sum, H.B. 500 changed the law starting on September 1, 2013, and does not apply to this case, which concerns 2008 and 2009. 7. The evidence is legally insufficient to support the trial court's find- ing that AMC is entitled to include its exhibition costs in its cost-of- goods-sold deduction. As argued in the Comptroller's Cross-Appellants' Brief, AMC does not ac- quire or produce goods for sale when it exhibits a movie. It sells either ( 1) a license to watch a movie, which is intangible prope1iy, or (2) experiences and memories, which are not goods, or (3) a service. In all three cases, it is not entitled to include Cross-Appellants' Reply Brief - Page 15 American Multi-Cinema, Inc. v. 1-legar, et al.; 03-14-00397-CV its exhibition costs in its cost-of-goods-sold deduction. Consequently, the evidence is legally insufficient to support the trial court's finding of fact no. 4: When AMC exhibits movies and other content to its paying custom- ers, it produces personal prope1iy that can be seen, weighed, meas- ured, felt, or touched or that is perceptible to the senses in any other manner for sale in its ordinary course of business. SCR.30. For the same reason, the Court should reverse trial court's conclusion of law no. 2: When AMC exhibits movies and other content to its paying custom- ers, AMC produces goods for sale in ordinary course of business un- der Section 171.1012, and may therefore include the costs of exhibit- ing movies and other content to its paying customers in its cost-of- goods-sold deduction under Section 171.1012 of the Texas Tax Code. SCR.30. No evidence supports finding of fact no. 4. There is a complete absence of evidence that AMC acquires, produces, or sells "goods" when it exhibits movies. In fact, the evidence conclusively establishes the opposite of that vital fact- specifically, it establishes that AMC sells intangible property, non-property, or ser- vices, all of which are excluded from the statutory definition of"goods." Because conclusion of law no. 2 rests entirely on the trial court's determina- tion of finding of fact no. 4, there is no evidence to support conclusion of law no. 2. The Court should reverse the trial court's finding of fact no. 4 and conclusion of law no. 2 and render judgment that AMC take nothing. Cross-Appellants' Reply Brief - Page 16 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV Conclusion This Couii should reverse the trial court and render a judgment that AMC's exhibition costs may not be included in its cost-of-goods-sold deduction and that AMC take nothing by this suit. Respectfully submitted, KEN PAXTON Attorney General CHARLES E. ROY First Assistant Attorney General JAMES E. DA VIS Deputy Attorney General for Civil Litigation ROBERT O'KEEFE Division Chief Financial Litigation, Tax, and Charitable Trusts Division CHARLES K. ELDRED Attorney in Charge Financial Litigation, Tax, and Charitable Trusts Division State Bar No. 00793681 P.O. Box 12548 Austin, Texas 78711-2548 512-475-1743 512-477-2348 (fax) charles.eldred@texasattorneygeneral.gov Attorneys for Appellants Cross-Appellants' Reply Brief - Page 17 American Multi-Cinema, Inc . v. Hegar, et al. ; 03-14-00397-CV Certificate of Compliance In compliance with Texas Rule of Appellate Procedure 9.4(i)(2), this brief contains 3,830 words, excluding the portions of the brief exempted by Rule 9.4(i)(l). Charles K. Eldred Assistant Attorney General Certificate of Service I certify that a copy of this Cross-Appellants' Reply Brief was served by email and eservice to Doug Sigel, attorney for Appellee, on January 15, 2015 to doug. sigel@ryanlawllp. com. 4~Charles K. Eldred Assistant Attorney General Cross-A ppe llants' Reply Brief - Page 18 American Multi-C inema, Inc. v. Hegar, et al. ; 03- 14-00397-CV Appendix 1 Act of May 26, 2007, 80th Leg., R.S., ch. 1282, § 14, 2007 Tex. Gen. Laws 4282 Ch. 1281, § 1 80th LEGISLATURE-REGULAR SESSION Legiswtive Budget Board, Legislative Audit Committee, state auditor, and Texas Higher Education Coordinating Board a report including: (1) the fiscal transactions of the board and the plan manager under this subchapter during the preceding fiscal year; (2) the market and book value of the fund as of the end of the preceding fiscal year; (3) the asset allocations of the fund expressed in percentages of stocks, fixed income, cash, or other financial investments; (4) the rate of return on the investment of the fund's assets during the preceding fiscal year; and (5) an actuarial valuation of the assets and liabilities of the program, including the extent to which the program's liabilities are unfunded. (b) The board shall make the report described by Subsection (a) available to purchasers of prepaid tuition contracts. (c) Not later than December 1 of each year, the board shall provide to the coordinating board complete prepaid tuition contract sales information, including projected enrollments of beneficiaries at general academic teaching institutions and two-year institutions of higher education. Sec. 54. 778. AUDIT. The fund and the operations of the board are subject to audit by the state auditor in accordance with Chapter 321, Government Code. SECTION 2. Beginning September 1, 2008, the Prepaid Higher Education Tuition Board may enter into prepaid tuition contracts with purchasers and begin selling tuition units under those contracts in accordance with Subchapter H, Chapter 54, Education Code, as added by this Act. SECTION 3. This Act takes effect immediately if it receives a vote of two-thirds of all the members elected to each house, as provided by Section 39, Article III, Texas Constitution. If this Act does not receive the vote necessary for immediate effect, this Act takes effect September 1, 2007. Passed by the House on May 1, 2007: Yeas 145, Nays 0, 1 present, not voting; the House concurred in Senate amendments to H.B. No. 3900 on May 21, 2007: Yeas 141, Nays 0, 2 present, not voting; passed by the Senate, with amendments, on May 17, 2007: Yeas 31, Nays 0. Approved June 15, 2007. Effective June 15, 2007. CHAPTER 1282 H.B. No. 3928 AN ACT relating to technical changes to the revised franchise tax. Be it enacted by the Legislature of the State of Texas: SECTION 1. Section 171.0001, Tax Code, as effective January l, 2008, is amended by amending Subdivisions (6), (8), (9), (10), (15), and (17) and adding Subdivisions (11-a) and (13-a) to read as follows: (6) "Client company" means: (A) a person that contracts with a license holder under Chapter 91 [has the meaning assigned by SeGtioo-9-1,001-], Labor Code, and is assigned employees by the license holder under that contract; or (BJ a client of a temporary employment service, as that term. is defined by Section 93.001 (2), Labor Code, to whom individuals are assigned for a purpose described by that subdivision. 4282 80th LEGISLATURE-REGULAR SESSION Ch. 1282, § 1 (8) "Controlling interest" means: (A) for a corporation, either more than 50 [80] percent [Gl'-m4r-e], owned dire~tly or indirectly, of the total combined voting power of all classes o~ st~ck of the corporat10n, .or more than 50 [80] percent [or more], owned directly or mdirectly, of the beneficial ownership interest in the voting stock of the corporation; [arul] (B) for a partnership, association, trust, or other entity other than a limited liability company, more than 50 [80] percent [or more], owned directly or indirectly, of ~he capital, profit..-tent that the taxable entity capitall:ed that cost on its federal income t.a.J.~ return or m.a.y expense those costs [is-required or allowed tg eapitalize tlrn cost under federal law and regulations), except for costs exeluded under 4290 80th LEGISLATURE-REGULAR SESSION Ch. 1282, § 16 Subsection (e), or in accordance with Subsections (c), (d), and (f). If the taxable. entit¥ e~cts to capitalize costs, it must capitalize each cost allowed under this section that it c~pitalized 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 [pennitted by federal statutes and regillations]. This subsection does not affect the type or category of cost of goods sold that may be subtracted under this section. (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 Indust1·ial 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 pu.rposes of this subsection, an entity engaged in lending to unrelated parties solely for agricultural production offers loans to the public. (o) If a taxable entity, including a taxable entity with respect to wh-ich cost of goods sold is determined pursuant to Section 171.1014(e)(l), whose principal business activity is film or television produ.ction 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. SECTION 16. Section 171.1013, Tax Code, as effective January l, 2008, is amended by amending Subsections (a), (b), and (c) and adding Subsection (b-1) to read as follows: (a) Except as otherwise provided by this section, "wages and cash compensation" means the amount entered in the Medicare wages and tips box of Internal Revenue Service Form W-2 or any subsequent form with a different number or designation that substantially provides the same information. The term also includes, to the extent not included above: (1) net distributive income from a taxable entity treated as a partnership [partnerships and from trusts and limited liability eompanies treated as partnerships] for federal income tax purposes, but only if the person receiving the distribution is a natural person; (2) net distributive income from limited liability companies and corporations treated as S corporations for federal· income tax purposes, but only if the person receiving the distribu- tion is a natural person; [and] (3) stock awards and stock options deducted for federal income tax purposes; and (4) net distributfoe income from a limited liabil~ty company treated as a sole propri- etorship for federal income tax pi~rposes, but only if the person receiving the distribution is a natural person. (b) Subject to Section 171.1014, a taxable entity that elects to subtract compensation for the purpose of computing its taxable margin under Section 171.101 may subtract an amount equal to: (1) subject to the limitation in Subsection (c), all wages and cash compensation paid by the taxable entity to its officers, directors, owners, partners, and employees; and (2) the c?st of a~ bene~ts, to the extent deductible for federal income tax purposes, the taxable ~nt1ty provi~es to its officers, directors, owners, partners, and employees, including workers c.ompensat10n benefits, .health care, employer contributions made to employees' health savings accounts, and retirement [to the extent dedumillle for federal ineome tax purposes]. 4291 Ch. 1282, § 16 80th LEGISLATURE-REGULAR SESSION (b-1) This subsection applies to a taxable entity that is a small emplmJer, a.s that term is defined by Section 1501.002, Insnrance Code, and that has not provided health care benefits to any of its employees in the calendar year preceding the beginning date of its reporting period. Subject to Section 171.1014, a taxable entity to which this subsection applies that elects to subtract compensation for the purpose of computing its taxable margin 'Under Section 171.101 may s1tbtra.ct health care benefits as provided under Subsection (b) and may also subtract: (1) for the first 12-'lnonth period on which margin is based and in which the taxable entity provides health care benefits to all of its employees, an additional amount equal to 50 percent of the cost of health care benefits provided to its employees for that period; and (2) for the second 12-'lnonth period on which margin is based and in which the taxable entity provides health care benefits to all of its employees, an additional amount equal to 25 percent of the cost of health care benefits provided to its employees for that period. (c) Notwithstanding the actual amount of wages and cash compensation paid by a taxable entity to its officers, directors, owners, partners, and employees, a taxable entity may not include more than $300,000, or the amount determined under Section 171.006, per 12-'!nonth period on which margin is based, for any person in the amount of wages and cash compensation it determines under this section [SeGtien 171.101]. If a person is paid by more than one entity of a combined group, the combined group may not subtract in relation to that person a total of more than $300,000, or the amount determined under Section 171.006, per 12-'!nonth period on which margin is based. SECTION 17. Section 171.1014, Tax Code, as effective January 1, 2008, is amended by amending Subsections (b), (d), and (f) and adding Subsections (d-1), (h), and (i) to read as follows: (b) The combined group is a single taxable entity for purposes of the application of the tax imposed under this chapter, incl-uding Section 171.002(d). (d) For purposes of Section 171.101, a combined group shall make an election to subtract either cost of goods sold or compensation that applies to all of its members. Regardless of the election, the taxable margin of the combined group may not exceed 70 percent of the combined group's total revenue fmm its entire busine.~s, as provided by Section 171.101 (a)(l)(A). (d--1) A member of a combined group may claim as cost of goods sold those costs that qualify under Section 171.1012 if the goods for which the costs are incurred are owned by another member of the combined group. (f) For purposes of Section 171.101, a combined group that elects to subtract compensation shall determine that amount by: (1) determining the compensation for each of its members as provided by Section 171.1013 as if each member were an individual taxable entity, subject to the limitation prescribed by Section 171.1013(c); (2) adding the amounts of compensation determined under Subdivision (1) together; and (3) subtracting from the amount determined under Subdivision (2) any compensation amounts paid from one member of the combined group to another member of the combined group, but only to the extent the con-esponding item of total revenue was subtracted under Subsection (c)(:3). (h) Each taxable entity that is pad of a combined gro11p report shal~ for purposes of determining margin and apport-ionrnent, include its activities for the same period used by the combined grou.p. (i) Each member of the combined group shall be jointly and severally liable for the tax of the combined group. SECTION 18. Section 171.1015, Tax Code, as effective January 1, 2008, is amended to read as follows: Sec. 171.1015. REPORTING FOR CEI\TAIN PARTNERSHIPS IN TIERED PART- NERSHIP ARRANGEMENT. (a) In this section, "tiered partnership arrangement" means an ownership structure in which any [all) of the interests in one taxable entity treated as a 4292 80th LEGISLATURE-REGULAR SESSION Ch. 1282, § 20 partnership or [partHershlp, trust, or limited liability compaHy that is treated for ~ederal iHAArne taxes as a partnership or a limited liability company treated as] an S corporation for federal income tax purposes (a "lower tier entity" [an '\1pper tier partnershlp"]) are owned ~y one or more other taxable entities (an "upper [a "lower] tier entity"). A tiered partnership arrangement may have two or more tiers. (b) In addition to the tax it is required to pay under this chapter on its own taxable mar&in, a taxable entity that is an upper [a-Wwe.r] tier entity may include, for purposes of calculati:ig its own taxable margin, the total revenue [pay the ta.x on the taxable margiH) o! a lower. tier entity [higher tier partHership] if the lower tier entity [higher tier partnership] subrruts a report to the comptroller showing the amount of total revenue [taxable margin] that each upper [!ewer] tier entity that owns it should include within the upper [!ewer] tier entity's own taxable margin calculation, according to the ownership [profits] interest of the upper [!ewer] tier entity. [An tipper tier partnership is not reqHired to pay tax tinder this ehapter on any taxablo margin reported tinder this seetion.] (c) This section does not apply to that percentage of the total revenue [taxable margin] attributable to an upper [a-Wwe.r] tier entity by a lower tier entity [an tipper tier partnership) if the upper [!ewer] tier entity is not subject to the tax under this chapter. In this case, the lower tier entity [higher tier partnership] is liable for the tax on its taxable margin. (d) Section 171.002(d) does not apply to an upper tier entity if, before the attribution of any total revenu,e by a lower tier entity to an upper tier entity under this section, the lower tier entity does not meet the criteria of Section 171.002(d)(l) or (d)(2). (e) The comptroller shall adopt rules to administer this section. SECTION 19. Subchapter A, Chapter 171, Tax Code, is amended by adding Section 171.1016 to read as follows: Sec. 171.1016. E-Z COMPUTATION AND RATE. (a) Notwithstanding any other provision of this chapter, a taxable entity whose total revenue from its entire business is not more than $10 million may elect to pay the tax imposed under this chapter in the amount computed and at the rate provided by this section rather than in the amount computed and at the tax rate provided by Section 171.002. (b) The amount of the tax for which a taxable entity that elects to pay the tax as provided by this section is liable is computed by: (1) determining the taxable entity's total revenue from its entire business, as deter- mined under Section 171.1011; (2) apportioning the amount computed under Subdivision (1) to this state, as provided by Section 171.106, to determine the taxable entity's apportioned total revenue; and (SJ multiplying the amount computed under Subdivision (2) by the rate of 0.575 percent. (c) A taxable entity that elects to pay the tax as provided by this section may not take a credit, deduction, or other adjustment that is not specifically authorized by this section. (d) Section 171.0021 applies to a taxable entity that elects to pay the tax as provided by th is section. (e) A reference in this chapter or other law to the rate of the franchise tax means, as appropriate, the rate 1;,nder Section 171.002 or, for a taxable entity that elects to pay the tax as provided by this section, the rate under this section. SECTION 20. Section 171.103, Tax Code, as effective January 1, 2008, is amended by adding Subsections (c) and (d) to read as follows: (c) A taxable entity that is a combined group shall include in a repmt filed under Section 171.201 or 171.202, for each member of the combined group that does not have nexus with this state for the purpose of taxation: (1) the gross receipts computed under Si1.bsection (a); and (2) the gross receipts computed under Subsection (a) that are subject to tarntion in another state under a throwback law or regulation. (d) The information required by Subsection (c) may be used for informational purposes only. The comptroller shall adopt rules as necessary to enforce the report1:ng requirement prescribed by Subsection (c). 4293 Ch. 1282, § 21 80th LEGISLATURE-REGULAR SESSION SECTION 21. Section l 71.1055(b), Tax Code, as effective January 1, 2008, is amended to read as follows: (b) In apportioning margin, receipts derived from transactions between individual members of a combined group that are excluded under Section 171.1014(c)(3) may not be included in the receipts of the taxable entity from its business done in this state as determined under Section 171.103, except that receipts ultimately derived from the sale of tangible personal property between individual members of a combined group where one member party to the transaction does not have nexus in this state shall be included in the receipts of the taxable entity from its business done in this state as determined under Section 171.103 to the extent that the member of the combined group that does not have nexus in this state resells the tangible personal property without substantial modification to a purchaser in this state. "Receipts ultimately derived from the sale" means the amount paid for the tangible personal prnperty by the third party purchaser. SECTION 22. Section 171.106, Tax Code, as effective January 1, 2008, is amended by adding Subsection (f) to read as follows: (j) Notwithstanding Section 171.1055, if a loan or security is treated as inventory of the seller for federal income tax purposes, the gross proceeds of the sale of that loan or security are considered gross receipts. SECTION 23. Section 171.111, Tax Code, as effective January 1, 2008, is amended to read as follows: Sec. 171.111. TEMPORARY CREDIT ON TAXABLE MARGIN. (a) On the first report originally due under this chapter on or after Jan·uary 1, 2008, [Not later than Mareh 1, 2001,) a taxable entity must [maJl] notify the comptroller in writing of its intent to [~ its right to) take a credit in an amount allowed by this section on the tax due on taxable margin. The taxable entity may thereafter elect to claim the credit for the current year and future year at or before the original due date of any report due after January 1, 2008 [2001], until the taxable entity revokes the election or this section expires, whichever is earlier. A taxable entity may claim the credit for not more than 20 consecutive privilege periods beginning with the first report originally due under this chapter on or after January 1, 2008 (2001]. A taxable entity may make only one election under this section and the election may not be conveyed, assigned, or transferred to another entity. (b) The credit allowed under this section for any privilege period is computed by: (1) determining the amount of the business loss carryforwards of the taxable entity under Section 171.llO(e), as that section appli.ed to annual reports originally due before Janua.ry 1, 2008, that were not exhansted on a repatt originally d1te nnder this chapter before January 1, 2008[, as of the end of thB--taxable entity's acco1rntrng year ending in 2006, of the difference between (i) the taxable entity's deductible temporary differenees and net operatrng loss carryforv,zards, net of related vah•ation allowance amounts, shmvn on the ta.xable entity's books and reeords on the last day of its ta.xable year ending in 2006, and (ii) the ta.xable entity's taxable-temp~y differenees ag shown on those books and reeords on that date. The-amooBt of other net deferred tax items may be less thaB-Wro. For the- purpose of cornputrng the amount of the taxable entity's other net deferred ta.x items, any credit earryfurward allowed under this ehapter shall be exGluded from the amount of deductible ternperary differences to the extent such credit carryforward amount, net of any related "aluation allowance amou.nt,is-Gtherwise included in the taxable entity's deduetible temporary differ.ences,BBt-of related valuation allowaiw~wunts, shovm on the taxable entity's books and records on the last day of the taxable entity's taxable year ending in 2006); (2) [apflGrtioning the amount determined unoor Subdivision (1) to this state in the same manner taxable margin is apporti{}ned--urule!'-£eetion 171.106 on the first report du~ after January 1 1 2007; [(3)) multiplying the amount determined under Subdivision (1) [(.2.)] by: (A) 2.25 [l.{)] percent for reports originally due on or after January 1, 2008, and before January 1, 2018; and (B) 7. 75 percent for reports originally due on or after January 1, 2018, and before September 1, 2027; and 4294 80th LEGISLATURE-REGULAR SESSION Ch. 1282, § 26 (3) [(i!j] multiplying the amount determined under Subdivision (2) [{&f] by 4.5 percent [the tax rate prescribed by Section 171.002(a)(2)]. ( c) [A ta.xable entity that notifies the comptroller of its intent to preserve its right to take a credit allov,red by this section-shall submit with its notice of intent a statement of the amo~nt determined under £ubsection (b)(l),] The comptroller may request that the taxable entity submit, with each [in-tl:ie] annual report [for each succeeding privilege period] in which the taxable entity is eligible to take a credit, information relating to the amount determined under Subsection (b)(l). The taxable entity shall submit in the form and content the comptroller requires any information relating to [the assets and liabilities that determine the amount of the credit,] the amount determined under Subsection (b)(l)[,] or any other matter relevant to the computation of the credit for which the taxable entity is eligible. (d) A credit that a taxable entity is entitled to under this section may [doos] not be conveyed [cenvey], [and may not be] assigned, or transferred[, in relation to a transaction in whlilli the taxable entity is purchased by another entity]. A taxable entity loses the right to claim the credit if the entity changes combined groups after June 30, 2007. (d-1) A taxable entity, other than a combined group, may not claim the credit under this section unless the taxable entity was, on May 1, 2006, subject to the tax imposed by this chapter as this chapter existed on that date. A taxable entity that is a combined group may claim the credit for each member entity that was, on May 1, 2006, subject to the tax imposed by this chapter as this chapter existed on that date and shall compute the amou.nt of the credit for that member as provided by this section. (d-2) The amoimt of credit claimed, including any unused credit carried forward, may not exceed the amount of franchise tax due for the report. Unused credits may not be carried forward to reports originally due on or after September 1, 2027. (e) This section expires September 1, 2027 [202(;]. SECTION 24. Section 171.1121(b), Tax Code, as effective January 1, 2008, is amended to read as follows: (b) Except as otherwise provided by this section, a taxable entity shall use the same accounting methods to apportion margin as used in computing margin [reportable ooderal ~mmme]. SECTION 25. Section 171.1532(b), Tax Code, as effective January 1, 2008, is amended to read as follows: (b) The tax covering the regular annual period, other than a regular annual period included on the initial report, is based on the business done by the taxable entity during the period beginning with the day after the last date upon which taxable margin or net taxable earned surplus on a previous report was based and ending with its last accounting period ending date for federal income tax purposes in the year before the year in which the report is originally due. SECTION 26. Section 171.201(a), Tax Code, as effective January l, 2008, is amended to read as follows: (a) Except as provided by Section 171.2022, a taxable entity on which the franchise tax is imposed shall file an initial report with the comptroller containing: (1) financial information of the taxable entity necessarrJ to compute the tax under this chapter [showmg-the-fiHaH.cial condition of the taxable entity on the day that is the last day of a calendar month and that is nearest to the end of the taxahle-entity's first year of ~]; (2) the name and address of: (A) each officer, director, and manager of the taxable entity; (B) for a limited partnership, each general partner; (C) for a general partnership or limited liability partnership, each managing partner or, if there is not a managing partner, each partner; or (D) for a trust, each trnstee; (:3) the name and address of the agent of the taxable entity designated under Section 171.354; and 4295 Ch. 1282, § 26 80th LEGISLATURE-REGULAR SESSION (4) other information required by the comptroller. SECTION 27. Sections 171.203(a), (b), (d), and (e), Tax Code, as effective January 1, 2008, are amended to read as follows: (a) A corporation or limited liability company on which the franchise tax is imposed, regardless of whether the corporation or limited liability company is required to pay any tax, shall file a report with the comptroller containing: (1) the name of each corporation or limited liability company in which the corporation or limited liability company filing the report owns a 10 percent or greater interest and the percentage owned by the corporation or limited liability company; (2) the name of each corporation or limited liability company that owns a 10 percent or greater interest in the corporation or limited liability company filing the report; (3) the name, title, and mailing address of each person who is an officer or director of the corporation or limited liability company on the date the report is filed and the expiration date of each person's term as an officer or director, if any; (4) the name and address of the agent of the corporation or limited liability company designated under Section 171.354; and (5) the address of the corporation's or limited liability company's principal office and principal place of business. (b) The corporation or limited liability company shall file the report once a year on a form prescribed by the comptroller. (d) The corporation or limited liability company shall send a copy of the report to each person named in the report under Subsection (a)(3) who is not currently employed by the corporation or limited liability company or a related corporation or limited liability company listed in Subsection (a)(l) or (2). An officer or director of the corporation or limited liah'ility company or another authorized person must sign the report under a certification that: (1) all information contained in the report is true and correct to the best of the person's knowledge; and (2) a copy of the report has been mailed to each person identified in this subsection on the date the return is filed. (e) If a person's name is included in a report under Subsection (a)(3) and the person is not an officer or director of the corporation or limited liab'ility company on the date the report is filed, the person may file with the comptroller a sworn statement disclaiming the person's status as shown on the report. The comptroller shall maintain a record of statements filed under this subsection and shall make that information available on request using the same procedures the comptroller uses for other requests for public information. SECTION 28. Section 171.204, Tax Code, as effective January l, 2008, is amended by adding Subsection (c) to read as follows: (c) The comptroller may require any entity to file information as necessary to verify that the entity is not subject to the tax imposed under this chapter. SECTION 29. Subchapter E, Chapter 171, Tax Code, is amended by adding Section 171.2125 to read as follows: Sec. 171.2125. CALCULATING COST OF GOODS OR COMPENSATION IN STAFF LEASING ARRANGEMENTS. Jn calculating cost of goods sold or compensation, a tarcable entity that is a client company of a staff leasing services company shall rely on information provided by the staff leasing services company on a form promulgated by the comptroller or an invoice. SECTION 30. Subchapter E, Chapter 171, Tax Code, is amended by adding Section 171.214 to read as follows: Sec. 171.214. BUSINESS TAX ADVISORY COMMITTEE. (a) The Business Tax Advi- sory Committee is created. The committee is composed of (1) two members of the house of representatives, appointed by the speaker of the house of representatives; 4296 80th LEGISLATURE-REGULAR SESSION Ch. 1282, § 33 (2) two members of the senate, appointed by the lieutenant governor; and (3) the following persons appointed by the comptroller: (A) at least five residents of this state who are engaged in a private business, as either an employee or an owner, that is subject to taxation under this chapter; and (B) at least two residents of this state with expertise in state business taxation. (b) The comptroller shall determine the number of residents appointed under Subsection (a)(3). (c) The comptroller is the presiding officer of the advisory committee. (d) The advisory committee shall conduct a biennial study of the effects of the tax imposed under this chapter on businesses in this state. The study must take into consideration: (1) the relative share of the tax paid by industry and by size of business; (2) how the incidence of the tax compares with the economic makeup of this state's business economy; (3) how the tax compares in structure and in amounts paid to the business taxes imposed by other states; (4) the effect of the tax on the economic climate of this state, including the effect on capital investment and job creation; (5) any factors that result in the tax not operating as intended; and (6) any other item presented by the comptroller or by a majority of the committee. (e) The comptroller by rule shall establish procedures for the functions of the advisory committee, including procedures requiring the advisory committee to issue a report on its findings to the speaker of the house of representati1Jes, the lieutenant governor, and the governor not later than the date each regular session of the legislature begins. (j) This section expires January ~1, 2013. SECTION 31. Subchapter G, Chapter 171, Tax Code, is amended by adding Sections 171.3015 and 171.3125 to read as follows: Sec. 171.3015. FORFEITURE OF CERTIFICATE OR REGISTRATION OF TAXABLE ENTITY. The comptroller may, for the same reasons and using the same procedures the comptroller uses in relation to the forfeiture of a corporation's charter or certificate of a1lthority, forfeit the certificate or registration of a taxable entity. Sec. 171.312.5. REVIVAL OF CERTIFICATE OR REGISTRATION OF TAXABLE ENTITY AFTER FORFEITURE BY SECRETARY OF STATE. (a) The secretary of state may, using the same procedures the secretarzJ uses in relation to the revival of a corpora- tion's charter or certificate, revive the certificate or registration of a taxable entity. (b) The secretary of state may adopt rules to implement this section. SECTION 32. Section 171.309, Tax Code, is amended to read as follows: Sec. 171.309. FORFEITURE BY SECRETARY OF STATE. The secretary of state may forfeit the charter, [Gl'l certificate, or registration of a taxable entity [of authority of a corporatioll) if: (1) the secretary receives the comptroller's certification under Section 171.302 [Gf--this c-OOe]; and (2) the taxable entity [wrporatioH] does not revive its forfeited [oorporate] privileges within 120 days after the date that the [corporate] privileges were forfeited[-;--anG [(3) the corporation does not have assets from whieh a judgmeHt for-any tax, pe!lalty or c-0urt-Gosts imposed by this chapter-may be satisfied]. ' SECTION 33. Section 17, Chapter 1, Acts of the 79th Legislature, 3rd Called Session, 2006, 1s amended to read as follows: Sec. 17. [~The-repeal of Sect.ioll 171.111, Tax Code, by this Act does Hot affeet a credit that accrued Hnder that sectioo-Wl-Ol'e-thB-B#ective date of this Act. [(bj] A corporation that has any unused credits established [aoorned] before the effective date of this Act under Section 171.111, Tax Code, may claim those unused credits on or with 4297 Ch. 1282, § 33 80th LEGISLATURE-REGULAR SESSION the tax report for the period in which the credits were established [aoomed], and the former law under which the corporation established [~] the credits is continued in effect for purposes of determining the amount of the credits the corporation may claim and the manner in which the corporation may claim the credits. SECTION 34. Sections 18(b) through (f), Chapter 1, Acts of the 79th Legislature, 3rd Called Session, 2006, are amended to read as follows: (b) This section does not affect a credit authorized by a provision listed in Subsection (a) of this section that was established [~%] under Chapter 171, Tax Code, before the effective date of this Act or a credit that continues to acc111e under Section 19 of this Act. (c) A corporation that has any unused credits established [aoomed] before the effective date of this Act under a provision other than Subchapter 0, P, or Q, Chapter 171, Tax Code, may claim those unused credits on or with the tax report for the period in which the credits were established [aoomed], and the former law under which the corporation established [~] the credits is continued in effect for purposes of determining the amount of the credits the corporation may claim and the manner in which the corporation may claim the credits. (d) A corporation that has any unused credits established [~] before the effective date of this Act under Subchapter 0, Chapter 171, Tax Code, may claim those unused credits on or with the tax report for the period in which the credit was established [~]. However, if the corporation was allowed to carry forward unused credits under that subchapter, the corporation may continue to apply those credits on or with each consecutive report until the earlier of the date the credit would have expired under the terms of Subchapter 0, Chapter 171, Tax Code, had it continued in existence, or December 31, 2027, and the former law under which the corporation established [~] the credits is continued in effect for purposes of determining the amount of the credits the corporation may claim and the manner in which the corporation may claim the credits. (e) A corporation that has any unused credits established [~] before the effective date of this Act under Subchapter P, Chapter 171, Tax Code, may claim those unused credits on or with the tax report for the period in which the credit was established [~]. However, if the corporation was allowed to carry forward unused credits under that subchapter, the corporation may continue to apply those credits on or with each consecutive report until the earlier of the date the credit would have expired under the terms of Subchapter P, Chapter 171, Tax Code, had it continued in existence, or December 31, 2012, and the former law under which the corporation established [~] the credits is continued in effect for purposes of determining the amount of the credits the corporation may claim and the manner in which the corporation may claim the credits. (f) A corporation that has any unused credits established [~] before the effective date of this Act under Subchapter Q, Chapter 171, Tax Code, may claim those unused credits on or with the tax report for the period in which the credit was established [~]. However, if the corporation was allowed to carry forward unused credits under that subchapter, the corporation may continue to apply those credits on or with each consecutive report until the earlier of the date the credit would have expired under the terms of Subchapter Q, Chapter 171, Tax Code, had it continued in existence, or December 31, 2012, and the former law under which the corporation established [~-(Jl'Uoo] the credits is continued in effect for purposes of determining the amount of the credits the corporation may claim and the manner in which the corporation may claim the credits. SECTION 35. (a) Section 22, Chapter 1, Acts of the 79th Legislature, 3rd Called Session, 2006, is amended by amending Subsection Cb) and adding Subsections (b-1), (b-2), and (g) to read as follows: (b) For an entity becoming subject to the franchise tax under this Act: (1) margin or gross receipts occurring before June 1, 2006, may not be considered for purposes of determining taxable margin or for app01tionment purposes; and (2) an entity subject to the franchise tax on January 1, 2008, that was not previously subject to the tax and for which January 1, 2008, is not the beginning date, shall file an annual report due May 15, 2008, based on the period: 4298 80th LEGISLATURE-REGULAR SESSION Ch. 1282, § 35(b) (A) if the entity has an accounting period that ends on or after January 1, 2007, and before June 1, 2007: (i) beginning on the later of: (a) June 1, 2006; or (b) the date the entity was organized in this state or, if a foreign entity, the date it began doing business in this state; and (ii) ending on the date that accounting period ends in 2007; (B) if the entity has an accounting period that ends on or after June 1, 2007, and before December 31, 2007: (i) beginning on the date that accounting period begins; and (ii) ending on the date that accounting period ends in 2007; and (C) if the entity has an accounting period that ends on December 31, 2007, or if the entity does not have an accounting period that ends in 2007: (i) beginning on the later of: (a) January 1, 2007; or (b) the date the entity was organized in the state or, if a foreign entity, the date it began doing business in this state; and (ii) ending on December 31, 2007[;---arui [(3) an entity subject to the franchise ta.x as it existed before the effective date of this Act at any time after December 31, 2008, and before January 1, 2008, bYt not sybjeet to the franchise ta..x on January 1, 2008, shall file a final repot1 for the privilege of doing business at any time after June 30, 2007, and before January 1, 2008, based on the period: [(A) beginning on the later of: [(i) January 1, 2007; or [(ii) the date the entitJ• was organized in this state or, if a foreign entity, the date it began doing business in this state;--and [(B) ending on the date the entitJ' became no longer subjert to the frafiehise tax]. {b-1) This subsection applies to an entity that: (1) is not doing business in this state on January 1, 2008; (2) would be subject to the franchise tax as amended by this Act if it were doing business in this state on or after January 1, 2008, but would not have been subject to the franchise tax as it existed before being amended by this Act; and (3) was doing business in this state at any time after June 30, 2007, and before January 1, 2008. (b-2) An entity to which Subsection (b-1) applies shall,, for the privilege of doing business in this state at any time after June 30, 2007, and before January 1, 2008, file a final report and pay an additional tax equal to the appropriate rate under Section 171.002, Tax Code, as amended by this Act, of the entity's taxable margin based on the period: (1) beginning on the later of (A) January 1, 2007; or (B) the date the entity was organized in this state or, if a foreign entity, the date it began doing business in this state; and (2) ending on the date the entity became no longer subject to the tax. (g) Except as provided by Subsections. (b-1) and {b-2) of this section, an entity becoming subject to the franchise tax under this Act that is part of a combined group report shall,, for purposes of determining margin and apportionment, include its activity for the same period u,sed by the combined group. (b) This section takes effect immediately if this Act receives a vote of two-thirds of all the members elected to each house, as provided by Section 39, Article III, Texas Constitution. If this Act does not receive the vote necessary for immediate effect, this section takes effect September 1, 2007. 4299 Ch. 1282, § 36 80th LEGISLATURE-REGULAR SESSION SECTION 36. Sections 23(b) and (f), Chapter 1, Acts of the 79th Legislature, 3rd Called Session, 2006, are amended to read as follows: (b) The information report required under this section must contain the same information that an entity required to file the report would have submitted in its report due to the comptroller in 2006 under Chapter 171, Tax Code, if the changes made by this Act to Chapter 171, Tax Code, had been in effect January 1, 2006. The information report shall also contain the total of maintenance and operations school property taxes paid by the entity to school districts in Texas in the 2005 [, 200G, and 2007] tax year (~]. The comptroller shall provide the forms and instructions to the entities required to file a report under this section. (f) The comptroller: (1) shall identify the entities described by Subsection (d) of this section; (2) shall prepare all forms and instructions required for those entities to file their information reports as required by this section; (3) shall provide those fonns and instructions to those entities on or after November 15, 2006, but before December 2, 2006; (4) shall require the entities to submit their information reports on or before February 15, 2007[, and February 15, 2008]; (5) may not grant any extensions for filing the information reports; and (6) shall report to the governor, the lieutenant governor, and the members of the legislature, on or before April 1, 2007, land April 1, 2008,] the results of the information reports, stating the amount of revenue generated by the tax under Chapter 171, Tax Code, [in each year,] the amount that would have been generated from the entities submitting information reports under this section if the changes made by this Act to Chapter 171, Tax Code, had been in effect ,January 1, 2006, and the school maintenance and operations property taxes paid by the entities in the 2005 [, 2006, aw:l-2007] tax year [;yeaJ'S]. SECTION 37. The following provisions of the Tax Code are repealed: (1) Section 171.00ll(e), as effective January 1, 2008; (2) Section 171.1011(p)(4-b), as effective January 1, 2008; (3) Section 171.1014(g), as effective January 1, 2008; and (4) Section 171.2035, as effective January 1, 2008. SECTION 38. This Act applies only to a report originally due on or after the effective date of this Act. SECTION 39. The taxation method provided by Section 171.002, Tax Code, as amended by this Act, and the taxation method provided by Section 171.1016, Tax Code, as added by this Act, are not severable, and neither provision would have been enacted without the other. If the taxation method provided by Section 171.002, Tax Code, as amended by this Act, is held invalid, the taxation method provided by Section 171.1016, Tax Code, as added by this Act, is also invalid. SECTION 40. Except as otherwise provided by this Act, this Act takes effect January l, 2008. Passed by the House on May 2, 2007: Yeas 138, Nays 3, 2 present, not voting; that the House refused to concur in Senate amendments to H.B. No. 3928 on May 23, 2007, and requested the appointment of a conference committee to consider the differ- ences between the two houses; the House adopted the conference committee report on H.B. No. 3928 on May 26, 2007: Yeas 136, Nays 5, 3 present, not voting; passed by the Senate, with amendments, on May 18,. 2007: Yeas 28, Nays 1; at the request of the House, the Senate appointed a conference committee to consider the differences between the two houses; the Senate adopted the conference committee report on H.B. No. 3928 on May 26, 2007: Yeas 30, Nays 0. Approved June 15, 2007. Effective January 1, 2008, except as provided by § 35(b). 4300 Appendix 2 Act of May 27, 2013, 83rd Leg., R.S., ch. 1232, § 10, 2013 Tex. Gen. Laws 3104, 3108 Ch. 1230, § 25(7) 83rd LEGISLATURE-REGULAR SESSION (7) Subsection (a), Section 386.252, Health and Safety Code, as amended by Chapters 589 (Senate Bill No. 20) and 892 (Senate Bill No. 385), Acts of the 82nd Legislature, Regular Session, 2011; (8) Subsection (f), Section 386.252, Health and Safety Code, as added by Chapter 589 (Senate Bill No. 20), Acts of the 82nd Legislature, Regular Session, 2011; and (9) Chapters 393 and 394, Health and Safety Code, as amended by Chapter 589 (Senate Bill No. 20), Acts of the 82nd Legislature, Regular Session, 2011. SECTION 26. This Act takes effect immediately if it receives a vote of two-thirds of all the members elected to each house, as provided by Section 39, Article III, Texas Constitution. If this Act does not receive the vote necessary for immediate effect, this Act takes effect September l, 2013. Passed the Senate on May 2, 2013: Yeas 29, Nays 1, one present not voting; the Senate concurred in House amendments on May 25, 2013: Yeas 28, Nays 2, one present not voting; passed the House, with amendments, on May 21, 2013: Yeas 107, Nays 39, two present not voting. Approved June 14, 2013. Effective June 14, 2013. CHAPTER 1231 H.B. No. 2984 AN ACT relating to lobbying expenditures that are made jointly. Be it enacted by the Legislature of the State of Texas: SECTION 1. Section 305.0021(b), Government Code, is amended to read as follows: (b) For purposes of Section 36.02 or 36.10, Penal Code, a person described by Subsection (a)(2)(A) is not considered to have made an expenditure [tho amount of a joint oxponditlH'O that is attril:mtod to a person vlho is not a registrant is not an expenditure made aHd reported) in accordance with this chapter. SECTION 2. The amendment made by this Act to Section 305.0021(b), Government Code, is intended to clarify rather than change existing law. SECTION 3. This Act takes effect September 1, 2013. Passed by the House on April 25, 2013: Yeas 135, Nays 1, 2 present, not voting; passed by the Senate on May 22, 2013: Yeas 31, Nays 0. Approved June 14, 2013. Effective September 1, 2013. CHAPTER 1232 H.B. No. 500 AN ACT relating to the computation of the franchise tax, including certain exclusions from the tax. Be it enacted by the Legislature of the State of Texas: SECTION 1. Section 171.0001(12), Tax Code, is amended to read as follows: (12) "Retail trade" means: (A) the activities described in Division G of the 1987 Standard Industrial Classification Manual published by the federal Office of Management and Budget; [aml) 3104 83rd LEGISLATURE-REGULAR SESSION Ch. 1232, § 3 (B) apparel rental activities classified as Industry 5999 or 7299 of the 1987 Standard Industrial Classification Manual published by the federal Office of Management and Budget; (C) the activities classified as Industry Group 753 of the 1987 Standard Industrial Classification Manual [Yltblished by the federal Office of Management and Budget; (D) rental-purchase agreement activities regulated by Chapter 92, Business & Com- merce Code; (E) activities involving the rental or leasing of tools, party and event supplies, and furniture that are classified as lndustn1 7359 of the 1987 Standard Industrial Classifi- cation Manual published by the federal Office of Management and Budget; and (F) heavy construction equipment rental or leasing activities classified as Industry 73.53 of the 1987 Standard Industrial Classification Manual published by the federal Office of Management and Budget. SECTION 2. Subchapter A, Chapter 171, Tax Code, is amended by adding Sections 171.0022 and 171.0023 to read as follows: Sec. 171.0022. TEMPORARY PERMISSIVE ALTERNATE RATES FOR 2014. (a) Notwithstanding Section 171.002(a) and subject to Section 171.1016 and Subsection (b) of this section, a taxable entity may elect to pay the tax imposed under this chapter at a rate of 0.97.5 percent of taxable margin. (b) Notwithstanding Section 171.002(b) and subject to Section 171.1016, a taxable entity primarily engaged in retail or wholesale trade as defined by Sections 171.002(c) and (c-1) may elect to pay the tax imposed under this chapter at a rate of 0.4875 percent of taxable margin. (c) This section applies only to a report originally due on or after JanuanJ 1, 2014, and before JanuanJ 1, '2015. (d) This section expires December 31, 2014. Sec. 171.0023. TEMPORARY PERMISSIVE ALTERNATE RATES FOR 2015. (a) Notwithstanding Section 171.002(a) and subject to Section 171.1016 and Subsections (b) and (d) of this section, a taxable entity may elect to pay the tax imposed under this chapter at a rate of 0.9.5 percent of taxable margin. (b) Notwithstanding Section 171.002(b) and subject to Section 171.1016 and Subsection (d) of this section, a taxable entity primarily engaged in retail or wholesale trade as defined by Sections 171.002(c) and (c-1) may elect to pay the tax imposed under this chapter at a rate of 0.475 percent of taxable margin. (c) This section applies only to a report originally due on or after Januan1 1, 201.5, and before Januan11, 2016. (d) A taxable entity may elect to compute the taa; at the rate provided by Subsection (a) or (b), as applicable, on a report specified by Subsection (c) only if the comptroller certifies, on or after September 1, 2014, that probable revenue for the state fiscal biennium ending August 31, 201.5, is estimated to exceed probable revenue as stated in the comptroller's Biennial Revenue Estimate for the 2014-2015 fiscal biennium, as adjusted for estimates of revenue and disbursements associated with legislation enacted by the 83rd Legislature, including any contingent appropriations certified before September 1, 2014, by an amount sufficient to offset the loss in probable revenue that will result if taa;able entities elect to compute the taa; at the rates provided by Subsections (a) and (b). If the comptroller does not make the certification described by this subsection, a taxable entity may not elect to pay the taa; at the rate provided by Subsection (a) or (b) and shall pay the tax at the rates provided by Section 171.002. (e) This section expires December 31, 2015. SECTION 3. Section 171.006(b), Tax Code, is amended to read as follows: (b) Beginning in 2010, on January 1 of each even-numbered year, the amount.s prescribed by Sections l 71.002(d)(2) [, l7Ul021,] and 171.1013(c) are increased or decreased by an amount equal to the amount prescribed by those sections on December 31 of the preceding 3105 Ch. 1232, § 3 83rd LEGISLATURE-REGULAR SESSION year multiplied by the percentage increase or decrease during the preceding state fiscal biennium in the consumer price index and rounded to the nearest $10,000. SECTION 4. Section 171.052(a), Tax Code, is amended to read as follows: (a) Except as provided by Subsection (c), an insurance organization, title insurance company, or title insurance agent authorized to engage in insurance business in this state that is [rn] required to pay an annual tax [Ynder Chapter 4 or 9, Insuranee Code,] measured by its gross premium receipts is exempted from the franchise tax. A nonadmitted insurance organization that is required to pay a gross premium receipts tax during a tax year is exempted from the franchise tax for that same tax year. A nonadmitted insurance organization that is subject to an occupation tax or any other tax that is imposed for the privilege of doing business in another state or a foreign jurisdiction, including a tax on gross premium receipts, is exemptedjrom the franchise tax. SECTION 5. Subchapter B, Chapter 171, Tax Code, is amended by adding Section 171.086 to read as follows: Sec. 171.086. EXEMPTION: POLITICAL SUBDIVISION CORPORATION. A political subdivision corporation formed under Section 304.001, Local Government Code, is exempted from the franchise tax. SECTION 6. Sections 171.lOl(a) and (b), Tax Code, are amended to read as follows: (a) The taxable margin of a taxable entity is computed by: (1) determining the taxable entity's margin, which is the lesser of: (A) the amount provided by this paragraph, which is the lesser of (i) 70 percent of the taxable entity's total revenue from its entire business, as determined under Section 171.1011; or (ii) an amount equal to the taxable entity's total revenue from its entire business as determined under Section 171.1011 minus $1 million; or (B) an amount computed by[• [(it] determining the taxable entity's total revenue from its entire business[,] under Section 171.1011 and [j Hill] subtracting the greater of (i) $1 million; or (ii) an amount equal to the sum of (a) [,] at the election of the taxable entity, either: (1) [Wl cost of goods sold, as determined under Section 171.1012; or (2) [{b+] compensation, as determined under Section 171.1013; and (b) any [(iii) s\lbtraeting, in addition to any s\lbtraetieBs made llnder Sllbparagraph (ii)(a) Gr-W,] compensation, as determined under Section 171.1013, paid to an individual during the period the individual is serving on active duty as a member of the armed forces of the United States if the individual is a resident of this state at the time the individual is ordered to active duty and the cost of training a replacement for the individual; (2) apportioning the taxable entity's margin to this state as provided by Section 171.106 to determine the taxable entity's apportioned margin; and (3) subtracting from the amount computed under Subdivision (2) any other allowable deductions to determine the taxable entity's taxable margin. (b) Notwithstanding Subsection (a)(l)(B)(ii)(a) [(a)(l)(B)(ii)], a staff leasing services com- pany may subtract only the greater of $1 million as provided by Subsection (a)(l)(B)(i) or compensation as determined under Section 171.1013. SECTION 7. Section 171.1011, Tax Code, is amended by amending Subsection (g-4) and adding Subsections (g-8), (g-10), (g-11), (u), (v), and (x) to read as follows: (g-4) A taxable entity that is a pharmacy cooperative shall exclude from its total revenue, to the extent included under Subsection (c)(l)(A), (c)(2)(A), or (c)(3), flow-through funds from rebates from pharmacy wholesalers that are distributed to the pharmacy cooperative's 3106 83rd LEGISLATURE-REGULAR SESSION Ch. 1232, § 9 shareholders. A taxable entity that provides a pharmacy network shall exclude from its total revenue, to the extent included under Subsection (c){l)(A), (c)(2)(A), or (c)(S), reim- bursements, pursuant to contractual agreements, for payments to pharmacies in the phar- macy network. (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 Subsectwn (c)(l)(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 cmm~wnly 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 grave{,, industri- al sand, dirt, soi{,, 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 Subsectwn (c)(l)(A), (c)(2)(A), or (c}(3), subcontracting payments made by the taxable entity to 1wnemployee agents for the performance of transportatwn services on behalf of the taxable entity. For purposes of this subsectwn, "barite" means barium sulfate (BaS04), a mineral used as a weighing agent in oil and gas exploration. (g-11) A taxable entity that i8 primarily engaged in the business of performing landman services shall exclude from its total revenue, to the extent included under Subsectwn (c){l)(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 subsectwn, "landman services" means: (1) performing title searches for the purpose of determining ownership of or curing title defects related to oi{,, gas, or other related mineral or petroleum interests; (2) negotiating the acquisitwn or divestiture of mineral rights for the purpose of the exploration, development, or productwn of oi{,, 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 exploratwn, exploitation, dispositWn, develop- ment, or production of oi{,, gas, or other related mineral or petroleum interests. (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 Sectwn 171.1012(e)(3). (x) A taxable entity that is registered as a motor carrier under Chapter 643, Transporta- tion Code, shall exclude from its total revenue, to the extent included under Subsection (c){l)(A), (c)(2)(A), or (c)(J), flow-through revenue derived from taxes and fees. SECTION 8. Section 171.lOll(p), Tax Code, is amended by adding Subdivision (8) to read as follows: (8) "Vaccine" means a preparation or suspension of dead, live attenuated, or live fully virulent viruses or bacteria, or of antigenic proteins derived from the?n, used to prevent, ameliorate, or treat an infectious disease. SECTION 9. Section 171.1012, Tax Code, is amended by adding Subsections (k-2) and (k-3) to read as follows: · (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 oi{,, including finished petroleum products, natural gas, condensate, and natural gas liquids, except for a refinery installation 3107 Ch. 1232, § 9 83rd LEGISLATURE-REGULAR SESSION toot manufactu.res finished petroleum products from crude oil. N otwiJhstanding Subsection (e)(3) or (i), a pipeline entity providing services for others related to the product toot 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 mecoonical rem