ACCEPTED
03-14-00713-CV
6156364
THIRD COURT OF APPEALS
AUSTIN, TEXAS
7/21/2015 1:12:23 PM
JEFFREY D. KYLE
CLERK
No. 03-14-00713-CV
____________________________
FILED IN
IN THE COURT OF APPEALS 3rd COURT OF APPEALS
AUSTIN, TEXAS
THIRD JUDICIAL DISTRICT OF TEXAS7/21/2015 1:12:23 PM
AT AUSTIN JEFFREY D. KYLE
________________________________________ Clerk
Glenn Hegar, Comptroller of Public Accounts of the State of
Texas; and Ken Paxton, Attorney General of the State of Texas,
Appellants
v.
CGG Veritas Services (U.S.), Inc.,
Appellee.
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT
CAUSE NO. D-1-GN-12-001316, HONORABLE TIM SULAK PRESIDING
APPELLEE’S BRIEF
Amanda G. Taylor MARTENS, TODD, LEONARD,
ataylor@textaxlaw.com TAYLOR & AHLRICH
Texas Bar No. 24045921 301 Congress Avenue, Suite 1950
James F. Martens Austin, Texas 78701
jmartens@textaxlaw.com Tele: (512) 542-9898
Texas Bar No. 13050720 Fax: (512) 542-9899
Lacy L. Leonard
lleonard@textaxlaw.com
Texas Bar No. 24040561 ATTORNEYS FOR APPELLEE,
Danielle Ahlrich CGG VERITAS SERVICES (U.S.),
dahlrich@textaxlaw.com INC.
Texas Bar No. 24059215
ORAL ARGUMENT REQUESTED
TABLE OF CONTENTS
TABLE OF CONTENTS .....................................................................................i
INDEX OF AUTHORITIES .............................................................................. v
RECORD ABBREVIATIONS ........................................................................... ix
REQUEST FOR ORAL ARGUMENT................................................................ x
RESPONSIVE ISSUES PRESENTED .............................................................. xi
STATEMENT OF FACTS .................................................................................. 1
I. CGG PRODUCES AND SELLS SEISMIC DATA FOR USE IN OIL &
GAS PROJECTS.................................................................................. 1
A. The Acquisition and Production of Seismic Data
Requires Physical and Mental Effort that is Difficult
and Costly. ............................................................................ 1
B. Seismic Data is Essential to Drilling Projects. ..................... 5
C. Sales to Proprietary Customers. .......................................... 7
D. Sales through Multi-Client Data Library (MCDL). ............ 8
II. PROCEDURAL HISTORY. .................................................................. 11
A. CGG Calculated its 2008 Franchise Taxes Using the
COGS Deduction. ............................................................... 11
B. The Comptroller Denied the COGS Deduction and
Assessed Additional Taxes Based on Incomplete
Information. ....................................................................... 12
C. CGG Paid the Assessment Under Protest and Filed
Suit...................................................................................... 14
i
D. The Comptroller’s Counterclaim Was Separately
Resolved. ............................................................................ 16
E. CGG Has “Apportionment” Claims Separately
Pending at the Administrative Level. ................................ 16
F. The Trial Court Entered a Final Judgment and Made
Findings and Conclusions in Favor of CGG....................... 18
SUMMARY OF THE ARGUMENT ................................................................. 19
STANDARDS OF REVIEW .............................................................................22
I. STATUTORY CONSTRUCTION. ...........................................................22
II. FINDINGS OF FACT AND CONCLUSIONS OF LAW. ...............................23
ARGUMENT ...................................................................................................25
I. FRANCHISE (MARGIN) TAX CALCULATION. ......................................25
II. THE COGS DEDUCTION, SECTION 171.1012. .................................. 28
A. Does the Taxpayer Qualify for the COGS Deduction? ...... 28
B. What Costs are Allowed for the COGS Deduction? .......... 30
III. CGG QUALIFIES FOR THE COGS DEDUCTION. ................................ 30
A. CGG Qualifies as a “Deemed Owner.” ............................... 31
1. CGG furnishes labor and materials. .........................32
a. Labor. ............................................................. 33
b. Materials. ....................................................... 34
c. The Comptroller’s categorical attempt to
separate “labor and materials” from
“geological and geophysical” work
misinterprets the statute. ...............................35
ii
d. The Comptroller’s argument that CGG’s
work is a “service” that is not “fatiguing,
difficult, or compulsory” enough to
constitute “labor” is an improper recast
of its previously-rejected “physical
change” theory. .............................................. 40
e. The Comptroller’s two-sentence
argument regarding “materials” is
unavailing....................................................... 44
2. CGG’s activities are sufficiently connected to a
real-property improvement project. ........................45
B. CGG Qualifies as an “Actual Owner.” ............................... 50
1. CGG owns and sells seismic data. ........................... 50
2. The seismic data is a “good” for purposes of the
COGS deduction. ...................................................... 51
a. TPP for COGS is different than TPP for
sales tax or apportionment. ........................... 54
b. CGG’s seismic data satisfies the
definition in Section
171.1012(a)(3)(A)(ii)........................................ 57
IV. ALL OF CGG’S COSTS ARE ALLOWED FOR THE COGS
DEDUCTION....................................................................................63
A. The Comptroller Waived Any Challenge to the Actual
Costs Deducted. ..................................................................63
B. The Statute Does Not Require Parsing of Costs. ...............65
V. NO DEFERENCE IS OWED TO THE COMPTROLLER’S POSITIONS. ........ 68
iii
PRAYER ..........................................................................................................70
CERTIFICATE OF COMPLIANCE ................................................................. 71
CERTIFICATE OF SERVICE .......................................................................... 72
APPENDIX:
1. P.Ex.4, p.D0062-68: August 2010 Auditor Dullum’s Notes
2. P.Ex.5: September 2010 Additional Tax Assessment
3. P.Ex.19: CGG’s COGS Calculation, Breakdown
4. P.Ex.48: CGG’s COGS Calculation, Overview
iv
INDEX OF AUTHORITIES
CASES
American Multi-Cinema, Inc. v. Hegar,
No. 03-14-00397-CV, --S.W.3d --, 2015 WL 1967877
(Tex. App.—Austin Apr. 30, 2015, no. pet. h.) ............................ passim
Avis v. First Nat. Bank of Wichita Falls,
174 S.W.2d 255 (Tex. 1943) .................................................................51
City of Keller v. Wilson,
168 S.W.3d 802 (Tex. 2005 ................................................................ 60
Combs v. Newpark,
422 S.W.3d 46 (Tex. App.—Austin 2013, no pet.)....................... passim
Combs v. Roark Amusement & Vending, L.P.,
422 S.W.3d 632 (Tex. 2013) ................................................... 23, 49, 68
DPRS 15th St., Inc. v. Texas Skyline, Ltd.,
No. 03-11-00101-CV, 2014 WL 4058796 (Tex. App.—Austin
Aug. 13, 2014, no pet.) ........................................................................ 24
Graham Cent. Station, Inc. v. Pena,
442 S.W.3d 261 (Tex. 2014)................................................................ 24
Greater Houston P’ship v. Paxton,
No. 13-0745, 2015 WL 3978138 (Tex. June 26, 2015) ........................ 22
Houston Fire & Cas. Ins. Co. v. Hales,
279 S.W.2d 389 (Tex. Civ. App.—Eastland 1955, writ ref’d n.r.e.) ...... 45
In re Bass,
113 S.W.3d 735 (Tex. 2003) ............................................................... 61
v
In re Nestle USA, Inc.,
387 S.W.3d 610 (Tex. 2012).......................................................... 25, 27
McGalliard v. Kuhlmann,
722 S.W.2d 694 (Tex. 1986) ............................................................... 24
Murray v. Grayum,
No. 03-10-00165-CV, 2011 WL 2533796 (Tex. App.—Austin
June 24, 2011, pet. denied) ................................................................. 24
Roark Amusement & Vending, L.P. v. Combs,
2011 WL 255535 (Tex. App.—Austin Jan. 26, 2011),
aff’d by 422 S.W.3d 632 (Tex. 2013) .................................................. 69
Sneed v. Webre,
12-0045, 2015 WL 3451653 (Tex. May 29, 2015) ............................... 38
TGS-NOPEC Geophysical Co. v. Combs,
340 S.W.3d 432 (Tex. 2011) ....................................................... passim
Titan Transp., LP v. Combs,
433 S.W.3d 625 (Tex. App.—Austin 2014, pet. denied) .......... 26, 27, 42
Upjohn Co. v. Rylander,
38 S.W.3d 600 (Tex. App.—Austin 2000, pet. denied)................. 69, 70
USA Waste Servs., Inc. v. Strayhorn,
150 S.W.3d 491 (Tex. App.—Austin 2004, pet. denied) ...................... 68
Vinson v. Brown,
80 S.W.3d 221 (Tex. App.—Austin 2002, no pet.) .............................. 24
W. L. MacAtee & Sons v. House,
153 S.W.2d 460 (Comm’n of App. adopted by Sup.Ct.) ...................... 45
vi
Zimmer US, Inc. v. Combs,
368 S.W.3d 579 (Tex. App.—Austin 2012, no pet.) ............................. 22
STATUTES & RULES
34 Tex. Admin. Code § 3.588 ...................................................... 29, 31, 51, 52
Tex. Gov’t Code § 311.005 ............................................................................ 38
Tex. Gov’t Code § 311.012............................................................................. 47
Tex. Gov’t Code Ch. 2001 ............................................................................ 42
Tex. R. App. P. 9.4 ........................................................................................ 71
Tex. R. App. P. 9.5........................................................................................ 72
Tex. R. App. P. 38.1 .................................................................................. x, 44
Tex. R. App. P. 39.1 ........................................................................................ x
Tex. R. App. P. 43.4 ..................................................................................... 70
Tex. R. Civ. P. 139 ........................................................................................ 70
Tex. Tax Code § 112.052 ................................................................................15
Tex. Tax Code § 112.060 ...............................................................................15
Tex. Tax Code § 121.151 ................................................................................. 17
Tex. Tax Code § 151.0031 ............................................................................. 52
Tex. Tax Code § 151.009 ........................................................................ 54, 55
vii
Tex. Tax Code § 171.051 ............................................................................... 69
Tex. Tax Code § 171.088............................................................................... 69
Tex. Tax Code § 171.103 ...............................................................17, 51, 54, 56
Tex. Tax Code § 171.1012 ...................................................................... passim
Tex. Tax Code § 171.1013 .............................................................................. 26
Tex. Tax Code § 171.1014 ............................................................. 11, 27, 37, 66
OTHER AUTHORITIES
Merriam-Webster’s Collegiate Dictionary 765 (11th ed. 2012) ...................... 35
Texas Comptroller of Public Accounts, Letter Ruling 201504069L
(April 23, 2015) .................................................................................. 67
Texas Comptroller of Public Accounts, Memorandum from Tax Policy
Division, 201406920L (June 10, 2014) .............................................. 43
Webster’s Third New International Dictionary 1259,
2075 (Phillip Gove Ed. 2002) ............................................................. 33
viii
RECORD ABBREVIATIONS
Appellee uses the following abbreviated references to the record:
Abbreviation Reference
CR Clerk’s Record (1 volume)
1.RR to 3.RR Volumes 1-3 of the Reporter’s Record, Trial
Transcript
4.RR.P.Ex, Volumes 4-5 of the Reporter’s Record, Plaintiff’s
5.RR.D.Ex and Defendants’ Trial Exhibits
Excerpts from three depositions were admitted to
be considered as part of the trial testimony
(2.RR.10, 32-36).
4.RR.P.Ex.46: Sarah Pai, the Comptroller’s
corporate representative.
5.RR.D.Ex.36: John Bastenagle, CGG’s regional
marketing and sales manager.
5.RR.D.Ex.35: Kay Hanson-Clerc, CGG’s vice-
president/multi-client controller worldwide.
1.Supp.RR Supplemental Reporter’s Record, Transcript of
Hearing on Motion to Enter Judgment
ix
REQUEST FOR ORAL ARGUMENT
Appellee CGG Veritas Services (U.S.), Inc. respectfully requests that
this Court grant oral argument to aid in the Court’s decisional process.
Although this Court has previously analyzed portions of Texas Tax Code
Section 171.1012 (i.e., the cost of goods sold (COGS) provision at issue here),
CGG agrees with the Comptroller that this case presents additional issues of
first impression beyond the Court’s prior holdings. Oral argument will assist
the Court in understanding the statutory framework and reasonable
interpretation of these provisions. Tex. R. App. P. 38.1(e), 39.1.
x
RESPONSIVE ISSUES PRESENTED
There is only one issue in this case: Did the trial court correctly decide
that the Comptroller (Appellants) improperly disallowed the $567 million
cost of goods sold (COGS) deduction claimed by CGG (Appellee) in
calculating its margin for franchise tax report year 2008? The answer is yes
and the judgment should be affirmed in full.
In response to the sub-issues raised by the Comptroller:
1. CGG correctly calculated its franchise taxes using the COGS
deduction because it qualifies as an “owner of goods” under
Texas Tax Code Section 171.1012(i). CGG qualifies as:
a. a “deemed owner” because it “furnishes labor or materials
to a project for the construction or improvement of real
property” by acquiring and producing seismic data that is
an essential part of the oil and gas drilling process.
[Responsive to Issues 3-4.]
b. an “actual owner” because it owns the seismic data that it
sells through a “multi-client data library” (MCDL), and
that data/images satisfies the definition of “goods” because
the Legislature has chosen to treat this otherwise
“intangible” property as an artificial form of “tangible
personal property” exclusively for purposes of the COGS
deduction. [Responsive to Issue 1.]
2. As a qualifying owner, the statute directs CGG to deduct all of the
costs allowed under Sections 171.1012(c), (d), and (f), which total
$567 million for report year 2008. The Comptroller failed to
preserve any argument at trial that this amount should be parsed
by business activity or by cost category. [Responsive to Issue 3.]
3. No deference is owed to the Comptroller’s positions because: (a)
the statute is unambiguous, (b) the Comptroller’s arguments are
unreasonable, and (c) the COGS deduction is akin to an
“exclusion” rather than an “exemption” from tax. [Responsive to
Issue 5.]
xi
STATEMENT OF FACTS
I. CGG PRODUCES AND SELLS SEISMIC DATA FOR USE IN OIL & GAS
PROJECTS.
Appellee CGGVeritas Services (U.S.), Inc. (“CGG”) is “a fully-integrated
geoseismic company.” (2.RR.73; CR.266 at FOF.2). CGG’s customers are
“E&P companies”: companies that explore for and produce oil and gas.
(2.RR.73-74; 5.RR.D.Ex.35, p.10; CR.266 at FOF.5). “CGG designs, acquires,
processes, [and] occasionally interprets seismic data” in a manner that “aids
in the construction of [its customers’] oil and gas wells.” (2.RR.74, 144;
4.RR.P.Ex.7, §§ 1, 4.1; 5.RR.D.Ex.3-12, 15; CR.265-66 at FOF.2-10).
A. The Acquisition and Production of Seismic Data Requires
Physical and Mental Effort that is Difficult and Costly.
CGG produces seismic images by collecting “sound waves” and then
“writ[ing] them out to some form of media.” (2.RR.76; CR.265 at FOF.3). A
large crew of workers using powerful materials and equipment, which “make
a physical impact on the property,” are required to create the sound waves.
(2.RR.106, 111; 3.RR.9; 4.RR.P.Ex.22; 4.RR.P.Ex.47). CGG’s materials and
equipment include dynamite, large vibroseis trucks that shake the ground,
marine “airguns” that “make a large bang in the water,” and GPS satellites.
(2.RR.76, 80-88, 134-35).
1
To shoot seismic on land, the dynamite is often placed 100-200 feet
below the surface, with tens or hundreds of thousands of “shot hole”
placements, by a crew of 75-100 people. (2.RR.82-83, 106; 3.RR.8-9). The
vibroseis trucks weigh between 60,000 to 90,000 pounds, and there are
normally five or six of them in the field. (2.RR.85, 106). The vibration
created by these trucks leaves a four-inch indentation to the earth below.
(2.RR.86, 106). For marine settings, CGG uses “as many as 50 airguns in an
array” and a vessel “about 300 feet long.” (2.RR.87). For example:
Land,
Dynamite
Land,
Vibroseis
2
Marine
(4.RR.P.Ex.47, p. 5, 7, 10) (in color, as admitted at trial).
CGG furnishes a variety of other materials in connection with the use
of its large equipment. For example, in one of its customer’s projects, CGG
was required to supply the following materials:
(4.RR.P.Ex.9, p.12).
3
CGG’s labor generate sound waves that “illuminate the subsurface of
the earth,” and allow CGG to “produce a three-dimensional image . . . to see
below the surface.” (2.RR.76, 81; 3.RR.7-8; 5.RR.D.Ex.15; 5.RR.D.Ex.36,
p.9-11; CR.265 at FOF.2, 4). The “seismic data in its raw form is written out
onto some sort of media, like magnetic tapes or USB drives.” (2.RR.81;
3.RR.7).
This is an “extremely specialized” process. (2.RR.88; 3.RR.21-22;
CR.265 at FOF.4). CGG does “[s]ome minor processing on site” at the
intended drilling location but then turns the raw sound recordings into
seismic images using “high-powered algorithms” at its processing center.
(2.RR.89, 133; 3.RR.7; 5.RR.D.Ex.36, p.14). This requires complex hardware
and software, and “a lot of highly-trained and experienced people.”
(2.RR.90, 112-13; 3.RR.10; 4.RR.P.Ex.14, p.18). Generating seismic images
is “a lot of science and somewhat of an art.” (2.RR.141). As one CGG
employee described it by simplified analogy: “the raw data is like a black and
white [photograph]. . . . I colorize it and I touch it up. And I print it out in a
form that you can use.” (5.RR.D.Ex.36, p.26). Generally, “[t]he ultimate
output is a high resolution digital image of the subsurface of the earth.”
(2.RR.92). For example:
4
(4.RR.P.Ex.47, p.14) (in color, as admitted at trial).
The time spent by CGG’s workers to acquire seismic date and produce
seismic images ranges from several months to several years. (2.RR.91, 137-
39). This process is very expensive. The “average” cost is “tens of millions of
dollars” and it can be as high as “hundreds of millions of dollars.” (3.RR.24-
25).
B. Seismic Data is Essential to Drilling Projects.
The geo-seismic work performed by CGG “constitutes an integral part”
of its customers’ oil and gas production business. (2.RR.102; CR.266 at
FOF.6-7, 10). The contracts between CGG and its E&P customers expressly
recognize that CGG’s work is performed for “the benefit of the [customer]”;
that “[t]he work performed by [CGG] . . . is part of [the customer’s] trade,
5
business, or occupation”; and “[a]s such, [CGG’s] work constitutes an
integral part of the [customer’s] business necessary to generate [customer’s]
goods, products, and services.” (4.RR.P.Ex.7, §§ 1, 4.1). CGG’s work is
“important to the entire drilling project.” (2.RR.130). All of CGG’s
customers intend to use the seismic data to construct productive oil and gas
wells. (3.RR.26-27). None of CGG’s customers pay for the acquisition and
production of seismic data simply to ignore it and drill regardless of the
information they see on the seismic images. (2.RR.130).
The purpose of the geophysical work performed by CGG is to locate oil
and gas for drilling and production. (2.RR.101; CR.266 at FOF.6-7, 10).
CGG’s seismic data provides a “roadmap” or a “blueprint for the project,”
which its customers use “as a guide [for] where to drill the wells, [and] how
deep to drill the wells.” (2.RR.75-76, 130). By demonstrating the “porosity,
permeability, rock type, . . . [and] depth” of the earth’s subsurface, CGG’s
seismic images allow petroleum companies “to identify fairly clearly
potential places to drill.” (2.RR.94-96). The data can also show “geo-
hazards,” like an “overpressurized zone[] . . . that would be dangerous to the
drilling operations.” (2.RR.130). In these instances, the data helps a
customer determine that it should drill elsewhere. (2.RR.130).
6
The subsurface of the earth is complex and non-uniform. There may
be salt domes and other structures under the surface that would prevent one
from reaching the oil and gas reservoirs if they were to just drill straight
down without the use of a seismic data map. (2.RR.78-80, 93). “[Y]ou have
to have a high-resolution image to be able to do that.” (2.RR.80). The
seismic map (especially in 4-D format) can identify mineral resources that
were otherwise compartmentalized and bypassed with prior methods.
(2.RR.116-17; 3.RR.24; 4.RR.P.Ex.14, § 1.5).
C. Sales to Proprietary Customers.
CGG performs its work for both “proprietary” and “non-proprietary”
customers. (2.RR.117; CR.265 at FOF.2). A proprietary customer is typically
an E&P company that pays CGG to develop and sell it seismic images of an
area designated by the customer for the customer’s exclusive ownership and
use. (2.RR.117). Proprietary customers acquire all rights to the seismic data
(both raw data and processed images). (2.RR.117, 134). This information is
confidential and provides a valuable edge over competitors. (2.RR.117).
CGG enters a Master Agreement for Geophysical Services with its
proprietary customers. (2.RR.101, 108-09; 4.RR.P.Ex.7; 4.RR.P.Ex.12). The
contract states the basic scope of work and describes the labor and materials
7
to be furnished to the project, as illustrated above. (2.RR.105, 109, 111; see,
e.g., 4.RR.P.Ex.7, p.1, 9, Schedules; 4.RR.P.Ex.9, p.12, 15-18).
CGG gets involved “early on” in the customer’s drilling project.
(2.RR.75). By this point, the typical customer has identified a prospective
drilling area based on “a lot of geologic work” and has “establish[ed] a lease
position” that will allow them to drill there. (2.RR.75, 96). The customers
specify the area where they want CGG to shoot seismic, the scope of CGG’s
work, and the necessary timeline. (2.RR.97). In some cases, a customer may
already own the raw data and provide it to CGG for processing. (2.RR.98,
141-42; 5.RR.D.Ex.36, p.12).
Because CGG’s seismic data is critical to the success of an oil and gas
project, CGG must deliver its products timely and keep the customer
informed. (2.RR.128; 3.RR.22-23). CGG provides frequent updates, and the
customers often have on-site representatives. (2.RR.128-29; 3.RR.25). CGG
may provide intermediate seismic images to help the customer make prompt
decisions about when and where to drill. (2.RR.140; 3.RR.26).
D. Sales through Multi-Client Data Library (MCDL).
The non-proprietary division of CGG’s business is called the “multi-
client data library” (MCDL). (2.RR.118; CR.266 at FOF.11). When a drilling
area is “hot” with several E&P companies interested, CGG may choose to
8
fund the up-front cost of acquiring the data and producing the seismic
images. (2.RR.118, 121; 4.RR.P.Ex.18). Sometimes, customers approach
CGG requesting that it produce MCDL images for a certain area, and they
help fund the project. (3.RR.19; 5.RR.D.Ex.36, p.12). Either way, to ensure
the endeavor is profitable, CGG will generally not begin MCDL work unless it
has a requisite minimum of “pre-commitments” from customers who want
to use the images. (See 5.RR.D.Ex.13, p.23-24).
CGG then puts those products “on the shelf” and “try[s] to sell them to
as many people as possible.” (2.RR.118-19; 3.RR.20; 4.RR.P.Ex.18;
5.RR.D.Ex.35, p.8, 12-13). The data available for any particular area can be
delivered in several different mediums or “derivatives,” ranging from the raw
sound recordings to a fully-processed image. (2.RR.118-19, 122; 3.RR.13-14;
4.RR.P.Ex.17; 5.RR.D.Ex.36, p.20).
The labor and materials necessary to acquire, process, and sell seismic
data is the same for the MCDL products as it is for the proprietary
customers. (5.RR.D.Ex.36, p.12-13, 17). The only difference is that, with
proprietary customers, CGG sells the exclusive rights to the data to one
customer, while with MCDL customers, CGG sells a non-exclusive license to
use the data to as many customers as possible. (5.RR.D.Ex.35, p.13, 16-17).
9
CGG enters a “Master Geophysical Data-Use License Agreement” with
MCDL customers. (2.RR.122, 124, 126; 4.RR.P.Ex.10; 4.RR.P.Ex.17;
5.RR.D.Ex.35, p.17). The customer purchases a “license to use” the seismic
data product. (2.RR.123, 125, 134; 5.RR.D.Ex.35, p.11, 17). CGG maintains
ownership of the underlying seismic data. (2.RR.123-24; 5.RR.D.Ex.36,
p.13, 17, 19). The Agreement specifies what the customer can do with the
data and places restrictions on the customer’s ability to share the
information. (2.RR.125, 143; 5.RR.D.Ex.35, p.17; 5.RR.D.Ex.36, p.28-29).
Supplements to the Agreement describe the medium of the data being
licensed. (2.RR.126-28; 5.RR.D.Ex.35, p.17-18).
CGG’s goal is to sell its MCDL data “to as many people as [it] can,”
regardless of the medium. (2.RR.119, 125; 3.RR.13; CR.267 at COL.13). Of
the 11,854 oil and gas companies registered with the Texas Railroad
Commission, CGG intends to sell its MCDL products to “[a]ll of them.”
(2.RR.120; 4.RR.P.Ex.25). As of trial, CGG had actively worked with more
than half (over 6,000) of those companies. (2.RR.120). It has licensed the
same seismic image for a single area to as many as 114 companies. (3.RR.17;
CR.266 at FOF.12).
10
II. PROCEDURAL HISTORY.
A. CGG Calculated its 2008 Franchise Taxes Using the COGS
Deduction.
CGG timely filed its 2008 Texas Franchise Tax Report paying
approximately $1.3 million in taxes. (3.RR.33; 4.RR.P.Ex.1; CR.267 at
FOF.14). CGG calculated its taxable margin by first determining its revenue
and then deducting its allowable costs of goods sold (“COGS”) from that
amount. (3.RR.37-39); see infra, Argument I.
CGG is a “combined group” that is required to calculate its franchise
taxes in accordance with Texas Tax Code Section 171.1014. (3.RR.34-37, 39).
As such, CGG must “file[] a single tax report . . . elect[ing] to take the same
general deduction [for] all members” of its integrated company. See Combs
v. Newpark, 422 S.W.3d 46, 48 (Tex. App.—Austin 2013, no pet.). 1 Upon
calculating the COGS amounts attributable to each of CGG’s members and
summing them together, CGG’s total COGS amount for report year 2008 was
$567,600,223 (hereafter, “$567 million”). (3.RR.41; 4.RR.P.Ex.1;
4.RR.P.Ex.19; CR.267 at FOF.15).2
1 The Comptroller does not raise any argument related to CGG’s combined group
status as it did in Newpark, 422 S.W.3d at 52.
2 There is a typographical error in FOF.15(c): it should cite Section 171.1012(f)
rather than subsection (e) regarding indirect or administrative overhead costs. (See
4.RR.P.Ex.1, line 12).
11
CGG’s tax department determined that it was eligible for the COGS
deduction based on frequent communication with the project managers and
personal knowledge about the nature of CGG’s business, including the facts
underlying the revenues and expenses reported in CGG’s general ledger.
(3.RR.40; 4.RR.P.Ex.21). They used this information to capture CGG’s costs,
and included in the COGS calculation only the costs eligible for deduction
under the statute. (3.RR.40-41, 48-52, 54-56; 4.RR.P.Ex.19; 4.RR.P.Ex.48;
5.RR.D.Ex.35, p.15); see Tex. Tax Code § 171.1012(c), (d), (e); infra,
Argument IV. CGG’s federal and state tax director, Ms. Listya Diyah—who
holds master’s degrees in both tax and finance, and has decades of corporate
experience in these areas (3.RR.29-32)—personally reviewed the source
documents and the calculations, and believes all of the numbers are
accurate. (3.RR.42-43, 53).
B. The Comptroller Denied the COGS Deduction and Assessed
Additional Taxes Based on Incomplete Information.
After CGG filed its tax report, it received a letter stating that the
Comptroller was reviewing whether CGG qualified for the COGS deduction.
(3.RR.44-45; 4.RR.P.Ex.2). The letter expressly stated that “[t]his review is
not an audit” but it directed CGG to “complete the enclosed form” and return
it within 15 days. (4.RR.P.Ex.2; see also 3.RR.81). The one-page form
12
requested only two pieces of information: (1) a description of the entity’s
activities, and (2) a list of items included in the COGS calculation.
(4.RR.P.Ex.3). CGG timely responded with this information. (3.RR.46-47;
4.RR.P.Ex.3). CGG anticipated that the Comptroller would then initiate a
formal audit but it did not receive any further communications in that
regard. (3.RR.47-48).
Instead, CGG received a letter stating that the Comptroller had
completed his review of CGG’s 2008 franchise tax report, and “determined
that [CGG] did not qualify for the [COGS] deduction.” (3.RR.48;
4.RR.P.Ex.5; CR.267 at FOF.16). The Comptroller included a bill assessing
CGG an additional $1,301,568 (hereafter, “$1.3 million”) in tax plus interest.
(3.RR.48, 54; 4.RR.P.Ex.5).
Mr. Gary Dullum, an auditor for the Comptroller, was responsible for
reviewing CGG’s information, making the decision to deny its COGS
deduction, and assessing CGG an additional $1.3 million in taxes. (3.RR.64,
78-79, 82-83; 4.RR.P.Ex.4-5). He did so as part of the Comptroller’s larger
“Cost of Goods Sold Project,” which targeted taxpayers statewide whom the
Comptroller believed to be “service providers” or “something other than . . .
manufacturing or retail or wholesale” providers. (3.RR.80, 91-92).
13
In making his decision about CGG’s 2008 taxes, Dullum never spoke
to CGG’s named representative, tax director Stephen Marshall. (3.RR.82;
4.RR.P.Ex.4, p.D0064). Dullum never visited CGG’s facilities nor otherwise
examined the nature of CGG’s business (beyond the two pages of
information provided by CGG in response to the Comptroller’s form and a
“tour” of CGG’s website). (3.RR.83; see 4.RR.P.Ex.3; 4.RR.P.Ex.4,
p.D0066). His notes reflect that he was not even aware of the work CGG
performed for its proprietary customers. (4.RR.P.Ex.4, p.D0065). Dullum
spent a total of 3 hours conducting a “limited” review before deciding to
assess CGG an additional $1.3 million in taxes. (3.RR.83; 4.RR.P.Ex.4,
p.D0062, 65).
Dullum’s incorrect conclusion was based on his misunderstandings
that CGG is merely a “service provider” and that Section 171.1012(i) requires
a taxpayer to “affect a physical change” to real property to qualify for the
COGS deduction—a litigating position taken at trial but now publically
abandoned by the Comptroller. (3.RR.80, 84-85, 88-89, 141; 4.RR.P.Ex.4,
p.D0066; 4.RR.P.Ex.46, p.31); infra, Argument III.A.1.d.
C. CGG Paid the Assessment Under Protest and Filed Suit.
CGG paid $1,483,233 under protest covering the $1.3 million in
additional taxes plus interest accrued through the date of payment.
14
(4.RR.P.Ex.6; CR.267 at FOF.17-18). CGG filed a protest letter with this
payment explaining, inter alia, why it qualified for the COGS deduction in
the full amount of $567 million. (4.RR.P.Ex.6). CGG thereafter filed suit
asserting these same grounds and seeking a full refund with interest.
(3.RR.54; CR.4-10, 265 at FOF.1); see also Tex. Tax Code §§ 112.052,
112.060. This claim was tried to the bench before the Honorable Tim Sulak
in Travis County.
Although CGG maintains that it qualifies to deduct the full COGS
amount and is entitled to a full refund on this basis, at trial it proved five
alternative calculations based on its various business activities. (3.RR.52-55;
4.RR.P.Ex. 49). CGG also provided a break-down of all of the costs included
in its COGS deduction by each category allowed for deduction under
Sections 171.1012(c), (d), and (f). (3.RR.40-41, 48-52, 54-56; 4.RR.P.Ex.19;
4.RR.P.Ex.48).
At trial, the Comptroller challenged only whether CGG qualified for the
COGS deduction under Section 171.1012(i). It preserved no argument about
whether the specific costs included in CGG’s COGS calculation are allowed
for deduction under subsections (c), (d), and (f). (See 2.RR.16; 3.RR.58-63,
91-98; CR.41-66); infra, Argument IV.A. The Comptroller rested without
presenting any evidence. (3.RR.161). The court “rule[d] in favor of [CGG]
15
for the full amount of the refund sought” and requested that CGG prepare an
appropriate order. (CR.217).
D. The Comptroller’s Counterclaim Was Separately Resolved.
The Comptroller counter-claimed that the amount of “research and
development (R&D) credit” claimed by CGG for report year was too high.
(CR.25-32). That claim was bifurcated and, following the COGS bench trial,
it was resolved by a joint stipulation. (CR.35, 188-89). The parties
stipulated that “the amount of the R&D carry-forward credit available for
[CGG] to claim beginning with its 2008 Texas Franchise Tax Report is
$782,268.” (CR.188-89).
E. CGG Has “Apportionment” Claims Separately Pending at the
Administrative Level.
Following resolution of the only two claims in this lawsuit, both parties
agreed that it was appropriate for the court to sign a final judgment that the
Comptroller owes CGG a tax refund for report year 2008. (CR.194, 200,
202-03). However, the parties disagreed about how to calculate that refund
in light of separately-pending administrative claims regarding the
“apportionment factor” to be used in calculating CGG’s 2008 taxes. (CR.203-
16
07, 228-230); see Tex. Tax Code § 121.151 (requiring that CGG initiate these
claims at the administrative level).3
If CGG prevails on its separate apportionment claims, it will further
decrease the “tax due” amount shown on line 30 of its 2008 franchise tax
report. (CR.206-07, 220). This, in turn, will impact how much of the R&D
credit CGG applies to its 2008 taxes versus carries forward for application to
future years because the credit is capped at 50% of the tax due amount for
any given year. (CR.207, 220, 225; 1.Supp.RR.19). In combination, this
could result in an additional refund owed to CGG of approximately $1
million. (CR.206; 1.Supp.RR.9, 11).
CGG was concerned that, if the judgment calculated a “final refund”
amount, the Comptroller would later argue CGG was barred by res judicata
or collateral estoppel from collecting any further refund for report year
2008. (1.Supp.RR.8-9). The Comptroller agreed it would not do so, and
agreed that CGG would be entitled to seek an additional refund if it prevails
on the apportionment claims. (1.Supp.RR.26-30).
3 “Apportionment” refers to the method by which CGG’s tax base is divided
between Texas and locations outside of Texas. Tex. Tax Code § 171.103. “Because all of
a company’s . . . taxable margin may not be attributable to business done in Texas,
receipts must be apportioned between Texas and other jurisdictions. The tax code does
this by multiplying an entity’s . . . taxable margin . . . by a fraction, the numerator of
which consists of receipts from business done in Texas, . . . and the denominator of
which consists of all receipts from business anywhere, including Texas.” TGS-NOPEC
Geophysical Co. v. Combs, 340 S.W.3d 432, 437 (Tex. 2011).
17
F. The Trial Court Entered a Final Judgment and Made Findings
and Conclusions in Favor of CGG.
The trial court entered a final judgment (1) concluding that CGG “is
entitled to claim a [COGS] deduction in the amount of $567,600,223” for
report year 2008; (2) incorporating the parties’ stipulation on the R&D
credit amount; and ordering that (3) CGG’s tax due4 was $1,721,022.23; (4)
the Comptroller shall issue an appropriate refund check with interest; and
(5) CGG shall not be barred from seeking an additional refund upon final
disposition of its apportionment claims. (CR.250-51).
The trial court also issued findings of fact (FOF) and conclusions of law
(COL) in support of the judgment. (CR.265-270). These findings and
conclusions confirm that CGG qualifies for the COGS deduction under
Section 171.1012(i), and that all of the costs included in its COGS calculation
were allowed by Sections 171.1012(c), (d), and (f). (CR.265-270).
4 The “tax due” amount (line 30) was calculated using the higher apportionment
factor, which CGG disputes via its administrative claims.
18
SUMMARY OF THE ARGUMENT
The trial court correctly determined that CGG is entitled to claim a
$567 million cost of goods sold (COGS) deduction in calculating its 2008
franchise taxes. Under the plain language of Texas Tax Code Section
171.1012, CGG qualifies to claim the COGS deduction because it is the actual
and/or deemed owner of goods (per subsection (i)), and CGG incurred costs
within the categories allowed for deduction (per subsections (c), (d), and (f)).
The Comptroller, who raises only a couple of legal sufficiency complaints,
has not demonstrated a complete absence of evidence to support any of the
trial court’s findings. The Comptroller also has not proven that any of the
court’s conclusions (which are fully supported by the underlying facts) are
legally wrong. The judgment should be affirmed.
The Comptroller’s analysis, which begins by looking at the specific
costs deducted, is convoluted. The threshold question is taxpayer eligibility.
Once it is determined that a taxpayer qualifies as either an actual or deemed
owner of goods to calculate its “margin” using the COGS deduction, then the
taxpayer calculates the amount of its deduction by summing together all of
the costs allowed by Section 171.1012.
To qualify as a “deemed owner,” a taxpayer need not actually own or
sell “goods” as defined by Section 171.1012(a). Thus, the meaning of
19
“tangible personal property” is irrelevant to this analysis. Instead, a taxpayer
who “furnishes labor or materials” to projects for the construction or
improvement of real property is “considered to be the owner of that labor or
materials,” which provides an alternative way to qualify for the COGS
deduction. CGG satisfies this test under the analysis set forth in Combs v.
Newpark, 422 S.W.3d 46, 49 (Tex. App.—Austin 2013, no pet.). In regard
to both its proprietary and MCDL customers, CGG exerts physical and
mental effort to acquire and produce seismic data, which is a critically
important part of oil and gas drilling/production projects. The Comptroller’s
contrary arguments (1) improperly conflate qualifying “activities” with
allowable “costs,” and (2) construe Newpark in an overly-narrow manner
based on the same principals underlying the Comptroller’s previously-
rejected theory that a taxpayer must “effect a physical change” to the
property.
To qualify as an “actual owner,” the taxpayer must actually own goods
based on traditional incidents of ownership. It is undisputed that CGG owns
the seismic data that it sells through the multi-client data library (MCDL).
This data, although otherwise considered “intangible” for sales tax and
apportionment purposes, is specially treated as “tangible personal property”
exclusively for purposes of the COGS deduction. Thus, it satisfies the
20
definition of “goods” under Section 171.1012(a)(3)(A)(ii). The Comptroller’s
argument is fundamentally flawed because it fails to appreciate the
difference in treatment of this unique type of intellectual property for
purposes of the COGS deduction, and his interpretation of the relevant
definition is overly narrow.
Because CGG qualifies under subsection (i) as an actual and/or
deemed owner, CGG is entitled to deduct all of its incurred costs allowed by
the categories listed in subsections (c), (d), and (f). For report year 2008,
this amount totaled $567 million, which was calculated for CGG’s entire
business as a combined group pursuant to the analysis set forth by this Court
in Newpark, 422 S.W.3d at 52. At trial, the Comptroller challenged only
whether CGG qualified for the COGS deduction and preserved no complaint
about the specific costs to be included in the calculation. In any event, CGG’s
calculation is legally correct and supported by sufficient evidence.
Section 171.1012 is not ambiguous. Newpark, 422 S.W.3d at 56 n.9
Hence, there is no need to defer to the Comptroller’s contrary litigating
position nor to add words or requirements into the statute that our
Legislature did not intend. Moreover, the COGS deduction should be
construed strictly against the Comptroller because it is akin to an “exclusion”
rather than an “exemption” from tax.
21
STANDARDS OF REVIEW
I. STATUTORY CONSTRUCTION.
“The issues in this case primarily concern the proper construction of
chapter 171 of the Tax Code.” Newpark, 422 S.W.3d at 49. Statutory
construction is a question of law reviewed de novo. Id. The primary
objective is to ascertain and give effect to the legislature’s intent by first
considering the statute’s plain language. Id. Courts should reject any
attempt to read words or requirements into the statute that were not
intended by our Legislature. See Zimmer US, Inc. v. Combs, 368 S.W.3d
579, 587 (Tex. App.—Austin 2012, no pet.). “Undefined terms in a statute
are typically given their ordinary meaning, but if a different or more precise
definition is apparent from the term’s use in the context of the statute, we
apply that meaning.” Greater Houston P’ship v. Paxton, No. 13-0745, 2015
WL 3978138, *5 (Tex. June 26, 2015) (quoting TGS–NOPEC Geophysical
Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011)).
If the statutory text is unambiguous, then “it is determinative of
legislative intent, unless enforcing the plain meaning of the statute’s words
would produce an absurd result.” Newpark, 422 S.W.3d at 49. “Only when
the statutory text is ambiguous ‘do we resort to rules of construction or
extrinsic aids.’” Id. (internal citations omitted).
22
Finally, “statutory determinations in tax disputes should reflect the
economic realities of the transactions in issue.” Combs v. Roark Amusement
& Vending, L.P., 422 S.W.3d 632, 637 (Tex. 2013). “And ‘[t]axing statutes
are construed strictly against the taxing authority and liberally for the
taxpayer.” Am. Multi-Cinema, Inc. v. Hegar, No. 03-14-00397-CV, --S.W.3d
--, 2015 WL 1967877, *3 (Tex. App.—Austin Apr. 30, 2015, no. pet. h.) .
II. FINDINGS OF FACT AND CONCLUSIONS OF LAW.
The trial court entered findings of fact and conclusions of law in
support of the judgment. (CR.265-270). The Comptroller specifically
challenges: FOF.12-13 (Appellants’ Brief, p.37-38: arguing findings are
irrelevant and supported by no evidence); COL.1, 2, 4, 5, 7 (id. p.29, 36, 42:
arguing conclusions are legally incorrect).5
“[F]indings of fact [are reviewed] for legal and factual sufficiency of the
evidence by the same standard applied to a jury verdict.” Am. Multi-
Cinema, 2015 WL 1967877, at *4. “When a party attacks the legal sufficiency
of an adverse finding on an issue on which it did not have the burden of
proof, it must demonstrate on appeal that no evidence supports the adverse
finding.” Graham Cent. Station, Inc. v. Pena, 442 S.W.3d 261, 263 (Tex.
5 The Comptroller also claims Finding 7 is “irrelevant” but otherwise concedes its
accuracy. Id., p.29-30, 42, 49 n.10. Despite the Comptroller’s failure to specifically
challenge Conclusions 8, 9, and 11, CGG interprets such a challenge to be within the
scope of the Comptroller’s argument.
23
2014). The court must credit favorable evidence if a reasonable fact-finder
could, and disregard contrary evidence unless a reasonable fact-finder could
not. Id. “The trial court, acting as factfinder, is the sole judge of credibility of
the witnesses and weight to be given to their testimony.” Newpark, 422
S.W.3d at 49.
“[C]onclusions of law [are reviewed] de novo to determine their
correctness.” Am. Multi-Cinema, 2015 WL 1967877, at *4. But even an
erroneous conclusion will not support reversal if the trial court rendered the
proper judgment. Id.; see also Vinson v. Brown, 80 S.W.3d 221, 230 (Tex.
App.—Austin 2002, no pet.).
Unchallenged fact findings are “binding on the appellate court unless
the contrary is established as a matter of law, or if there is no evidence to
support the finding.” McGalliard v. Kuhlmann, 722 S.W.2d 694, 696 (Tex.
1986). The court must disregard all contrary evidence and, if there is any
remaining evidence in support of the finding, it must be upheld; and if that
finding is sufficient to support the judgment, it should be affirmed. Id.; see
also DPRS 15th St., Inc. v. Texas Skyline, Ltd., No. 03-11-00101-CV, 2014
WL 4058796, *5-6 (Tex. App.—Austin Aug. 13, 2014, no pet.); Murray v.
Grayum, No. 03-10-00165-CV, 2011 WL 2533796, *5 (Tex. App.—Austin
June 24, 2011, pet. denied).
24
ARGUMENT
The trial court properly determined that CGG qualifies for the COGS
deduction as an actual or deemed owner of goods, and that CGG is entitled to
deduct $567 million in COGS as a result. By allowing CGG to deduct its costs
and arrive at a tax on net profits, the judgment comports with the overall
goal of the franchise tax: to tax a business’s margin.
This Court should reject the Comptroller’s arguments because they
arise from a misunderstanding of how Section 171.1012 operates, ignore
ample evidence in the record to support the trial court’s conclusions, and ask
this Court to read requirements into the statutory text not intended by our
Legislature. The final judgment appropriately interprets and applies Section
171.1012 to CGG’s business. It should be affirmed in full.
I. FRANCHISE (MARGIN) TAX CALCULATION.
The franchise tax is a tax on the privilege of doing business in Texas.
TGS-NOPEC, 340 S.W.3d 437. As amended in 2006, the tax is specifically
designed to be imposed on a business’s margin, not on its revenue, net
worth, or earned surplus. Id.; see also In re Nestle USA, Inc., 387 S.W.3d
610, 614, 622 (Tex. 2012). Margin is akin to net profits. See Tex. Tax Code
§ 171.101. To effectuate this purpose, the statute provides that every method
25
of calculating one’s franchise tax shall benefit from specified reductions to
the taxpayer’s total revenue, as discussed below. (See 2.RR.41; 3.RR.68).6
“[T]he first step for all taxable entities and all methods of computing
taxable margin is to calculate the taxpayer’s ‘total revenue.’” Titan Transp.,
LP v. Combs, 433 S.W.3d 625, 628 (Tex. App.—Austin 2014, pet. denied);
Tex. Tax Code § 171.1011 (a)-(d). Taxpayers determine total revenue by
subtracting statutory exclusions from the gross income reported on federal
income tax returns. Id. §§ 171.1011(e)-(g)(11), (k), (m)-(n), (q)-(r), (u)-(x).
“After calculating total revenue, taxpayers may then employ the
method of determining taxable margin that produces the lowest franchise-
tax obligation.” Titan, 433 S.W.3d at 628; Tex. Tax Code § 171.101 (a). For
report year 2008, the code offered three calculations using a specific
deduction from revenue plus additional credits: (1) the cost of goods sold
(COGS) deduction under Section 171.1012; (2) the compensation deduction
under Section 171.1013; and (3) the 70% ceiling/30% default deduction
under Section 171.101 (a)(1)(A). Titan, 433 S.W.3d at 628-29; Newpark, 422
S.W.3d at 47-48. 7
6 The Tax Code provisions applicable to this case are those in effect on January 1,
2008. For convenience, the citations herein are to the current version of the code unless
specified to indicate a substantive change between the 2008 and the current version.
7 In 2008, there was also a “short form” calculation known as the “E-Z method,”
providing a lower tax rate in lieu of any deductions and credits under Section 171.1016.
26
The total tax due is calculated as follows (with corresponding
references to the 2008 franchise tax report, see 4.RR.P.Ex.1):
Total Revenue (calculated with applicable exclusions), items 1-10
— Deduction (1 of 3 methods), items 11-21
= Margin, item 22
Margin
x Apportionment factor, items 23-25
= Apportioned margin, item 26
Apportioned margin
— Other allowable deductions, item 27
= Taxable margin, item 28
Taxable margin
x Tax rate (typically 1%; sometimes 0.5%), item 29
= Tax due, item 30
Tax due
— Tax credits, item 31
— Discount, item 33
= Total Franchise Tax Due, item 34
In re Nestle, 387 S.W.3d at 614-616; Titan, 433 S.W.3d at 627-28. Because
there is always some deduction from revenue, the resulting tax is one
imposed on an entity’s margin, not its revenue. See Tex. Tax Code
§ 171.1014(d).
“Effective January 1, 2014, taxpayers not using the E-Z computation method [] also have
the option to deduct a flat $1 million from total revenue if that sum is greater than the
COGS, compensation, or 30% deductions.” Titan, 433 S.W.3d at 628.
27
II. THE COGS DEDUCTION, SECTION 171.1012.
The only relevant calculation method in this suit is the COGS
deduction. The Comptroller’s analysis of Section 171.1012 is improperly
inverted. The Comptroller argues that the Court should first determine
whether CGG has any allowable costs to deduct as costs of goods sold
(COGS) and then determine whether CGG qualifies for the deduction. See
Appellants’ Brief, p.21, 25.
“That defies the logic of the statute.” (3.RR.155). The threshold
inquiry is whether the taxpayer qualifies under Section 171.1012(i) to claim
the COGS deduction. Once the taxpayer crosses that threshold test, the
taxpayer is entitled to calculate its COGS deduction by including all the costs
it incurred that are classified as allowable costs under subsections (c), (d),
and (f).
A. Does the Taxpayer Qualify for the COGS Deduction?
Section 171.1012(i) begins by stating that “A taxable entity may make a
subtraction under this section in relation to the cost of goods sold [i.e.
qualify to claim the COGS deduction] only if that entity owns the goods.”
Tex. Tax Code § 171.1012(i). A taxpayer can satisfy this test by being either
an “actual” or “deemed” owner of goods. Id. As discussed in more detail
below, these two terms mean:
28
Actual owner: a taxpayer who is the “owner of goods . . .
based on all of the facts and circumstances, including the
various benefits and burdens of ownership vested with the
taxable entity.” Id. § 171.1012(i), second sentence; see also
34 Tex. Admin. Code § 3.588(c)(8) (same).
Deemed owner: a taxpayer who “furnish[es] labor or
materials to a project for the construction, improvement,
remodeling, repair, or industrial maintenance . . . of real
property.” Tex. Tax Code § 171.1012(i), third sentence; see
also 34 Tex. Admin. Code § 3.588(c)(8)(A)-(B) (same).8
The Comptroller devotes much of his argument to whether CGG’s
seismic data satisfies the meaning of “goods,” as defined for purposes of
COGS to include certain types of “tangible personal property.” See Tex. Tax.
Code § 171.1012(a)(1), (3). These terms are relevant only to whether a
taxpayer is an “actual owner.” The Comptroller’s argument about “tangible”
property ignores the statute’s alternate provision entitling a taxpayer to
qualify as a “deemed owner.” CGG first addresses the deemed owner
provision, and then turns to the actual owner provision along with the
proper interpretation of goods or “tangible personal property” for purposes
of the COGS deduction.
8 The last sentence of Section 171.1012(i) provides another way to qualify as a
“deemed owner,” which is not relevant here: “a taxable entity shall be treated as the
owner of goods being manufactured or produced by the entity under a contract with the
federal government. . . .” Id. Other subsections allow certain types of taxpayers to take
the COGS deduction even if they are not “actual owners” of goods. See id. § 171.1012(k-
1) (regarding three types of rental or leasing companies), (k-2) (regarding pipeline
entities who own or lease and operate pipelines transporting product they do not own).
29
B. What Costs are Allowed for the COGS Deduction?
Once a taxpayer crosses the threshold qualification for the COGS
deduction (as either an actual or deemed owner of goods), the statute directs
the taxpayer to calculate the dollar amount of its deduction by adding all of
the costs it incurred under the categories allowed by subsections (c), (d), and
(f). See Tex. Tax Code § 171.1012(i), first sentence (actual and deemed
owners “may make a subtraction [of costs allowed] under this section”);
third sentence (confirming deemed owners may “include the costs, as
allowed by this section, in the computation of [COGS]”) (emphasis added);
id. §§ 171.1012(c), (d), (f). Infra, Argument IV.
The costs allowed “by or under this section” include “all direct costs of
acquiring or producing the goods,” and “up to 4% of its indirect or
administrative overhead costs—such as legal, security, and accounting
services—provided that it can demonstrate those costs ‘are allocable to the
acquisition or production of goods.’” Newpark, 422 S.W.3d at 53.
III. CGG QUALIFIES FOR THE COGS DEDUCTION.
CGG qualifies for the COGS deduction as a “deemed owner” based on
its proprietary and/or MCDL business activities. If this Court agrees, then
the judgment should be affirmed regardless of whether CGG’s seismic
images satisfy the definition of “goods” under Section 171.1012(a)(3)(A)(ii).
30
However, even if CGG were not a “deemed owner,” CGG would qualify as an
“actual owner of goods” based on its MCDL business activity. This provides
an alternative basis for affirming the final judgment in full.
A. CGG Qualifies as a “Deemed Owner.”
Under the third sentence of Section 171.1012(i), a taxpayer qualifies as
a “deemed owner” if it “furnish[es] labor or materials to a project for the
construction, improvement, remodeling, repair, or industrial maintenance . .
. of real property.” Tex. Tax Code § 171.1012(i). A taxpayer engaged in such
activity “is considered to be an owner of that labor or materials and may
include the costs, as allowed by this section, in the computation of cost of
goods sold.” Id.; see also 34 Tex. Admin. Code § 3.588(c)(8)(A)-(B) (same).
The Comptroller agrees with the concept of “deemed ownership” but
disputes whether CGG’s activities qualify. Appellants’ Brief, p.5, 44-45, 50.9
As discussed below, CGG satisfies both elements of the deemed-owner test
because (1) it furnishes labor or materials (2) in a manner that is sufficiently-
connected to a real-property improvement project.
The deemed owner provision applies when a taxpayer does not actually
own and sell “goods” as defined by subsection (a). The “labor or materials”
furnished by the taxpayer is substituted in lieu of “ownership of goods.” In
9 The Comptroller also disputes what costs are allowed for deduction upon
qualifying as a deemed owner. We address this issue separately. Infra, Argument IV.
31
Newpark, this Court recognized that the third sentence of subsection (i)
would be rendered “meaningless” if the taxpayer had to actually own or sell
goods to qualify for the COGS deduction as a deemed owner. Id. at 55.
As an initial matter, the Comptroller did not challenge Findings of Fact
8 and 9, which specifically state that CGG “furnishes labor” and “furnishes
materials.” (CR.266). Nor did the Comptroller challenge Findings 2-4,
which provide additional detail about the nature of CGG’s work, nor
Findings 5-7 and 10, which confirm that CGG’s labor and materials are
furnished for the purpose of oil and gas exploration and production.
(CR.265-66). Relatedly, the Comptroller does not challenge Conclusion of
Law 3, stating that “[o]il and gas wells constitute real property for purposes
of [Section] 171.1012(i).” (CR.268). The unchallenged findings are binding
on the Court because there is evidence in the record to support them, as
described below. The judgment should be affirmed because Conclusions of
Law 1 and 4 (concluding that CGG is eligible for the COGS deduction as a
deemed owner) stand on the basis of these findings. Supra, Standard of
Review II.
1. CGG furnishes labor and materials.
The first element to qualify as a deemed owner is that the taxpayer
“furnish labor or materials.” Tex. Tax Code § 171.1012(i). A taxpayer is not
32
required to furnish both labor and materials to qualify as a deemed owner;
either will suffice. Id. However, CGG furnishes both, and the judgment can
be affirmed on either ground standing alone.
a. Labor.
Section 171.1012 does not define “labor.” This Court addressed the
meaning of that term in Newpark, 422 S.W.3d at 56, which likewise involved
a taxpayer’s activities related to the production of oil and gas. “‘Labor’ is a
broad term that encompasses a wide range of activities, including
‘expenditure of physical or mental effort especially when fatiguing, difficult,
or compulsory.’” Newpark, 422 S.W.3d at 56 (quoting Webster’s Third New
International Dictionary 1259, 2075 (Phillip Gove Ed. 2002)). Because
nothing in the statutory text indicates that “labor” for purposes of the COGS
deduction has “a more limited meaning than its common definition,” this
Court “presume[d] that the legislature intended to allow taxable entities to
deduct a wide range of labor expenses.” Id. Under this definition, the post-
drilling “transport and disposal of [] used drilling mud and other waste
material” qualified as “labor.” Id. at 55, 57.
Just as in Newpark, CGG’s acquisition and production of seismic data
and images satisfies the meaning of “labor” under Section 171.1012(i). As
detailed in Statement of Facts I.A, CGG employs large crews to create sound
33
waves using specialized materials and equipment. CGG’s workers travel to
and spend a considerable amount of time at the physical locations where
their customers intend to construct wells for the production of oil and gas.
The work required to acquire seismic data on these project sites is intense
and requires specialized skills, such as drilling holes, blasting large swaths of
dynamite, driving thousands of geophones into the earth, shaking the earth
with a series of 60,000 to 90,000 pound vibrating trucks, and/or shooting
an array of large airguns into the sea and through the ocean floor to create
seismic sound waves. The second step of producing or processing seismic
data likewise requires a hefty expenditure of effort, albeit more mental than
physical. Here, highly-trained workers apply complicated algorithms and
geophysical concepts, using specialized hardware and software. In total,
this requires several months to several years of work.
CGG’s activities constitute the “expenditure of physical or mental
effort.” The efforts regarding both the acquisition of data and production of
seismic images are difficult, fatiguing, and require specialized skills. Thus,
CGG’s activities satisfy the meaning of “labor” under Section 171.1012(i).
b. Materials.
The meaning of “materials” is not defined by Section 171.1012, was not
at issue in Newpark, and has not otherwise been addressed by any appellate
34
court in the context of the COGS provision. As with “labor,” nothing in the
statutory text indicates an intention for the term “materials” to have any
narrower of a meaning than its common definition. See Tex. Tax Code
§ 171.1012(i). The common meaning of “material” is “elements, constituents,
or substances of which something is composed or can be made.” Merriam-
Webster’s Collegiate Dictionary 765 (11th ed. 2012). The definition also
includes, “something (as data) that may be worked into a more finished
form.” Id.
CGG furnishes materials in the form of dynamite, geophones, airguns,
cables, trucks, batteries, and other miscellaneous parts used to create sound
waves for the acquisition of seismic data, as well as the ultimate seismic data
or images provided for use in the exploration and production of oil and gas.
Supra, Statement of Facts I.A. These items satisfy the common meaning of
materials as used in Section 171.1012(i).
c. The Comptroller’s categorical attempt to separate
“labor and materials” from “geological and
geophysical” work misinterprets the statute.
The Comptroller attempts to categorically dismiss the labor and
materials furnished by CGG with a contrived argument that CGG’s activity
cannot be “labor or materials” because subsection (c) contains separate
provisions for “geological and geophysical costs” versus “labor” and
35
“material” costs. Appellants’ Brief, p.45-49. This argument fails for multiple
reasons.
Section 171.1012(c) provides in relevant part:
The cost of goods sold includes all direct costs of
acquiring or producing the goods, including:
(1) labor costs;
(2) cost of materials that are an integral part of
specific property produced;
(3) cost of materials that are consumed in the
ordinary course of performing production
activities; . . . [and]
(10) geological and geophysical costs incurred to
identify and locate property that has the
potential to produce minerals.
Tex. Tax Code § 171.1012(c).
As an initial matter, the Comptroller claims—without any citation to
the record—that the trial court “reject[ed]” CGG’s “argument that it was
entitled to a COGS deduction under § 171.1012(c)(10).” Id., p.45. This
represents a factual misunderstanding of what happened at trial, and it
relates to the Comptroller’s legal misunderstanding of how Section 171.1012
operates. Infra, Arguments II, IV. CGG did not argue that it “qualifies” for
the COGS deduction on the basis of subsection (c)(10). Rather, it claimed
that having qualified for the deduction as an actual or deemed owner under
36
subsection (i), it is entitled to deduct all of its incurred costs as allowed by
subsections (c), (d), and (f), including the costs specified under (c)(10).
(2.RR.41-43; 3.RR.103, 155-56; CR.84).
The record conclusively demonstrates that the trial court accepted
CGG’s argument that it was entitled to deduct the costs it incurred under
subsection (c)(10) and all other subcategories of CGG’s proven costs. CGG’s
tax director (Listya Diyah) testified about the costs incurred by CGG under
subsection (c)(10), and two exhibits provide a breakdown of these costs.
(3.RR.55-56; 4.RR.P.Ex.19, 48). This was sufficient evidence for the trial
court to find that CGG’s calculation included approximately $674 million10 in
subsection (c) costs (the total shown on CGG’s exhibits, including the full
amount of its (c)(10) costs), and to conclude that “[e]ach of the costs that
CGG included in its [COGS] deduction were allowed by [subsections] (c), (d),
and (f),” and that “CGG is entitled to claim [the total amount of its COGS
deduction] for Report Year 2008.” (CR.267-68 at FOF.15, COL.8-9). The
trial court could not have made these determinations if it “rejected” CGG’s
ability to include the (c)(10) costs in its COGS deduction. Moreover, Finding
10 The amount of subsection (c) costs is higher than CGG’s total COGS amount of
$567 million because the total calculation includes approximately $1.2 million in intra-
group eliminations, per the combined-reporting rules under Section 171.1014. (CR.267
at FOF.15(d)).
37
15 is binding on this Court because the Comptroller has not raised a
sufficiency challenge to it, and it is supported by the record.
The Comptroller’s categorical argument also misinterprets the
statutory text by conflating a description of activities with the costs incurred
to perform certain activities. See Appellants’ Brief, p.46. Subsection (i)
refers to the activities required for a taxpayer to qualify as a deemed owner of
goods: furnish labor or materials. Tex. Tax Code § 171.1012(i). As discussed
above, the statute does not limit the meaning of “labor” or “materials”
beyond their broad, common definitions. Subsection (c) describes thirteen
categories of direct costs that may be deducted by a taxpayer who qualifies
under subsection (i). Id. § 171.1012(c).
Notably, this list is written in inclusive rather than exclusive terms.
“‘Includes’ and ‘including’ are terms of enlargement and not of limitation or
exclusive enumeration, and use of the terms does not create a presumption
that components not expressed are excluded.” Sneed v. Webre, No. 12-0045,
2015 WL 3451653, *14 (Tex. May 29, 2015) (citing Tex. Gov’t Code
§ 311.005(13)). The list begins by identifying broad categories, such as the
descriptions of general labor and material costs in (c)(1)-(3), and then
delineates more industry-specific costs such as those in (c)(10). That does
not mean a taxpayer who deducts costs under (c)(10) is prohibited from also
38
deducting costs under (c)(1)-(3). Instead, all categories are “included” as
examples of the types of direct costs allowed for deduction by qualifying
taxpayers. Subsection (c)(10) is not rendered meaningless by this
interpretation.
This broad allowance of deductible costs does not limit the meaning of
the underlying activities. Just because a taxpayer incurs costs “to identify
and locate property that has the potential to produce minerals” does not
prohibit a conclusion that the taxpayer has also “furnished labor and
materials.” It would be illogical to conclude that a taxpayer who performs
“geological and geophysical” work never “furnishes labor or materials” as
part of that work. Stated another way, the activity of performing “geological
and geophysical work” is not mutually exclusive of “furnishing labor or
materials,” and vice-versa.
To the contrary, the statute’s express allowance of deductions for
oilfield related costs, such as intangible drilling costs and geological and
geophysical costs informs the court of the types of activities contemplated as
those eligible for COGS. Under the Comptroller’s analysis, oil and gas
drilling contractors would not be eligible to claim COGS for the reason that
their costs include, by and large, intangible drilling costs, which the statute
expressly allows under subsection (c)(7).
39
d. The Comptroller’s argument that CGG’s work is a
“service” that is not “fatiguing, difficult, or
compulsory” enough to constitute “labor” is an
improper recast of its previously-rejected “physical
change” theory.
The Comptroller next argues that CGG’s work does not constitute
“labor” because it is a “service” that is “sophisticated—not fatiguing, difficult,
or compulsory.” Appellants’ Brief, p.47. This argument misreads Newpark,
ignores evidence in the record, and is merely a repackaged version of the
Comptroller’s prior “physical change” argument, which has been twice
rejected by this Court and publically-abandoned by the Comptroller.
As here, the Comptroller argued in Newpark that NES’s transport and
disposal of used drilling waste were “clearly a service and not labor supplied
for the improvement of real property.” 422 S.W.3d at 56-57. This Court
rejected the argument, holding that that the meanings of “service” and
“labor” are not “mutually exclusive,” and “the[ir] ordinary definitions . . .
substantially overlap such that both definitions tend to refer to the words
interchangeably.” Id. at 54. Notably too, certain “service” costs are expressly
allowed for deduction under subsection (f), showing the Legislature’s intent
that aspects of “service” can be provided as part of “furnishing labor or
materials.” Tex. Tax Code § 171.1012(f); (3.RR.73, acknowledged by auditor
Dullum). Hence, although an activity may have attributes of “service,” that
40
does not holistically prevent it from constituting “labor.” CGG’s activity
qualifies as labor just as NES’s did.
Moreover, Newpark does not hold that a taxpayer’s activities are
absolutely required to be “fatiguing, difficult, or compulsory” to satisfy the
meaning of “labor.” Newpark holds that it will be “especially” clear that a
taxpayer’s efforts qualify as labor where any one of those (or presumably
similar) characteristics are present. 422 S.W.3d at 56. Newpark also holds
that “mental” effort can satisfy the definition of labor—it does not have to be
physical effort. Id. Granted, at some point, activities become “too far
removed” from a real-property construction project to qualify under Section
171.1012(i). Infra, Argument III.A.2. Nevertheless, Newpark does not
create a bright-line test that efforts must be “physical,” nor that they must be
“fatiguing, difficult, or compulsory” to qualify. In any event, the record
demonstrates that CGG’s activities satisfy the definition as described in
Newpark. Supra, Argument III.A.1.
At trial, the Comptroller’s auditor, Gary Dullum, testified that the only
reason he denied CGG the COGS deduction was because he considered CGG
a “service provider” rather than the actual driller/producer of minerals.
(3.RR.84-85). Dullum’s misunderstanding apparently arose from the
Comptroller’s training that, to qualify for the COGS deduction as a “deemed
41
owner” of goods under Section 171.1012(i), a taxpayer must “physically work
[on] and effect a change” to real property. (3.RR.88-89).
The Comptroller’s corporate representative, Sarah Pai, confirmed it
was the agency’s “litigation position and . . . policy . . . that an entity must
physically work on and effect a change to real property in order to be entitled
to take the [COGS] deduction available under 171.1012(i).” (4.RR.P.Ex.46,
p.31). She also confirmed that the only reason the Comptroller concluded
CGG does not qualify as a deemed owner under Section 171.1012(i) is
“because [CGG is] not physically working on the property and making a
change.” (Id., p.46). She acknowledged that CGG is “physically present on
the property and they’re working,” but claimed the “element they fail is that
work does not effect a physical change.” (Id., p.174; see also 2.RR.64; CR.61-
62).
After trial, the Comptroller publically-abandoned its “physical change”
argument in recognition of the fact that this Court has repeatedly rejected it.
In a June 2014 memorandum, the Comptroller’s office stated:
Based on the [Third Court’s] language and
analysis in TITAN and NEWPARK, we are revising the
policy with regard to subcontracting payments eligible
for . . . deduction under Section 171.1012(i). . . .11
11 Although this memorandum changed the Comptroller’s internal policy, it did not
establish a formal rule in the absence of public notice and comment. See Tex. Gov’t
Code Ch. 2001 (Administrative Procedure Act regarding notice and comment
rulemaking).
42
[W]e are expanding the interpretation of what is
considered to be furnishing labor or materials to a
[real property project] . . . and will no longer require
an entity to actually physically touch the property or
make a change to the property to qualify for the COGS
deduction. . . .
Texas Comptroller of Public Accounts, Memorandum from Tax Policy
Division, 201406920L (June 10, 2014) (STAR document available at
http://cpastar2.cpa.state.tx.us/index.html) (emphasis added). This “change
has immediate effect and a taxable entity may file an amended franchise tax
report for years that are open within the statute of limitations.” Id. Thus,
the change has retroactive application and must be applied to CGG in this
case.
Despite this announcement, the Comptroller’s Brief returns to the
same theory and underlying principles of the “physical change” argument,
and simply recasts them as CGG’s activities being too “sophisticated” and
“service” oriented, and not physically demanding (“fatiguing, difficult, or
compulsory”) enough to be considered “labor.” See Appellants’ Brief, p. 25-
26, 28-32, 47. Ultimately, this is the same argument, and it fails for the same
reason: None of these requirements are contained within the plain statutory
text requiring the taxpayer to “furnish labor or materials.” If the Legislature
wished to limit the provision to entities actually performing construction or
43
other physical labor or affecting a physical change onsite, it would have left
out the words “or materials” and “to a project,” which expand the scope of
the provision.
Moreover, Section 171.1012(i) explicitly applies to entities furnishing
labor or materials to a project for the industrial maintenance of real
property, which is outside the scope of normal activity for a “construction
company” and often would not result in any physical change to the property.
Auditor Dullum admitted this. (3.RR.75).
e. The Comptroller’s two-sentence argument regarding
“materials” is unavailing.
Beyond the Comptroller’s attempt to categorically dismiss CGG’s
“furnishing of labor or materials,” his only argument for why CGG does not
furnish materials is confined to two sentences without supporting legal or
factual analysis. Appellants’ Brief, p.47. The Comptroller argues that CGG’s
seismic data is not “consumed” in the drilling process. Id. To any extent this
argument has been adequately briefed for preservation under Texas Rule of
Appellate Procedure 38.1(i), it fails.
The Comptroller overlooks many of the other materials furnished by
CGG beyond its seismic data, and the Comptroller utilizes an overly-narrow
definition of “materials.” Supra, Argument III.A.1.b. The Comptroller relies
on Section 171.1012(c)(3), which allows deductions for the “cost of materials
44
consumed in the ordinary course of performing production activities.” To
any extent this cost category describes one type of material that could be
furnished under subsection (i), it does not do so exclusively. The meaning of
“materials furnished” is broader than the specific categories of material costs
that can be deducted. Moreover, our supreme court has held that
“consumption” of materials is not required to establish that they were
“furnished” for purposes of a materialman’s lien. Houston Fire & Cas. Ins.
Co. v. Hales, 279 S.W.2d 389, 392 (Tex. Civ. App.—Eastland 1955, writ ref’d
n.r.e.) (citing W. L. MacAtee & Sons v. House, 153 S.W.2d 460 (Comm’n of
App. adopted by Sup.Ct.)).
2. CGG’s activities are sufficiently connected to a real-
property improvement project.
To qualify for the COGS deduction as a deemed owner, the labor or
materials furnished by the taxpayer must be “to a project for the
construction, improvement, [etc.] of real property.” Tex. Tax Code
§ 171.1012(i). “It is undisputed that the drilling and construction of oil and
gas wells qualifies as construction or improvement to real property.”
Newpark, 422 S.W.3d at 55; (see also 4.RR.P.Ex.46, p.115). Thus, the only
question is whether CGG’s activities are sufficiently connected to projects for
the drilling and construction of oil and gas wells.
45
In Newpark, this Court did not create a bright-line test. Instead, it
held that satisfaction of this standard must be on a case-by-case basis. Id. at
56-57. There, the Court held that NES’s waste-disposal activity qualified
based on three considerations. One, “it is difficult to view [the activity] as
though it were not an essential and direct component of the drilling process.”
Id. at 56. Two, the Legislature indicated that such activity should qualify by
allowing deduction of “similar costs for scrap material and pollution control
devices.” Id. And three, the evidence demonstrated that drilling activity
could not continue without the waste removal and disposal activities
provided by NES. Id.
CGG’s activity is likewise sufficiently connected to oil and gas drilling
projects. In light of the uncontroverted testimony of Bob Montgomery and
the contractual agreements stating that CGG’s acquisition and production of
seismic data is an integral part of the customer’s drilling business, and
considering the millions of dollars E&P companies are willing to pay for this
critical work, it is difficult to view CGG’s activity as though it were not an
essential and direct component of the drilling process. Supra, Statement of
Facts I.B.
Second, the Legislature indicated that such activity should qualify by
specifically allowing deduction of “geological and geophysical costs incurred
46
to locate property that has potential to produce minerals.” See Tex. Tax
Code § 171.1012(c)(10). Contrary to the Comptroller’s argument, this
category of costs expands upon rather than limits the type of labor and
materials that should qualify under subsection (i). Supra, Arguments
III.A.1.c, IV.B.
Third, the record demonstrates that drilling activity could not
commence—or at least not do so successfully or in a manner that efficiently
locates all producible mineral reserves—without the seismic data “blueprint”
furnished by CGG. Supra, Statement of Facts I.B. These considerations
sufficiently support the trial court’s conclusion that CGG furnishes labor or
materials to a real-property construction or improvement project.
The Comptroller argues that CGG’s activities are “too far removed”
because its customer’s drilling projects are only “potential” not “actual.”
Appellants’ Brief, p.50-52. This argument reads words into the statute and
ignores important evidence in the record. Nothing in the statute specifies
the status of when a project “officially” begins, nor does the statute
definitively require that the labor or materials be furnished to only one
project rather than several. See Tex. Gov’t Code § 311.012(b) (In construing
statutes, “[t]he singular includes the plural and the plural includes the
singular.”).
47
Before CGG begins working with a proprietary customer, the customer
has already done a substantial amount of “macro geology” to identify the
general location they want to drill and have established lease rights on that
location to enable drilling once the minerals are located by CGG’s seismic
data. Supra, Statement of Facts I.C. Moreover, the customer is far enough
into the project to specify the parameters of work for CGG, and they remain
actively involved with CGG throughout the timeline of its work. Id.
Sometimes a customer has gone so far as to obtain initial seismic data for
CGG to process. This is sufficient evidence from which the trial court could
conclude that CGG furnishes labor and materials “to a project.”
In regard to CGG’s MCDL customers, CGG does not begin the process
of acquiring and producing seismic data in any location unless it is “hot”
with interest by several E&P companies to drill there. Supra, Statement of
Facts I.D. It would be far too costly of CGG to do otherwise. (See
5.RR.D.Ex.14, p.23-24: stating CGG’s policy of generally requiring a certain
number of “pre-commitments” from customers before beginning the
acquisition of MCDL data). Thus, at a minimum, the MCDL data is acquired
and produced “for a project” that is reasonably anticipated to occur.
Sometimes, customers approach CGG to shoot a specific area, akin to a
proprietary customer but with a trade-off of less cost for non-exclusive
48
rights. (3.RR.19; 5.RR.D.Ex.36, p.12). Moreover, by the time customers are
able to buy licenses “off the shelf,” they are presumably doing so for projects
that are underway.
The Comptroller’s arguments that CGG’s seismic data does not qualify
because it may indicate where not to drill, or because the drilling may not
ultimately be successful, or because drilling may not occur in the same tax
year, are all red herrings. Determining where to drill and not to drill are
equally essential components of the project. Just because a customer may
review the seismic map and decide to not drill in location A, but to instead
drill in location B, or to avoid a dangerous blowout and not drill at all, does
not mean CGG failed to furnish labor or materials “to a project.”
Furthermore, nothing in the statute requires that a taxpayer maintain books
and records that would somehow trace and parse its costs by the dates and
ultimate successes of the customers’ drilling projects. Such an argument
ignores the economic realities of business in direct contravention to the
Texas Supreme Court’s holding in Combs v. Roark Amusement & Vending,
L.P., 422 S.W.3d 632, 637 (Tex. 2013).
In Newpark the Comptroller vehemently argued NES’s activities were
nothing more than that of a “garbage collector,” which was clearly a service
and not the furnishing of labor or materials to a project for the construction
49
or improvement of real property. 422 S.W.3d at 55-57. Now, the
Comptroller argues the opposite, contending that NES’s transporters “must
rely heavily on human effort,” and that “mov[ing] drilling mud toward or
away from an existing project site” is a qualifying activity. Appellants’ Brief,
p.47, 51. Just as the Comptroller maintained an unreasonable argument for
years against Newpark, the Comptroller does so here against CGG. CGG
qualifies as a deemed owner for the COGS deduction just as NES/Newpark
did, and the Comptroller’s attempts to distinguish that case are unavailing.
B. CGG Qualifies as an “Actual Owner.”
Alternatively, CGG qualifies for the COGS deduction as an actual
owner of goods (i.e., an owner “based on all of the facts and circumstances,
including the various benefits and burdens of ownership vested with the
taxable entity”). See Tex. Tax Code § 171.1012(i), second sentence. Through
its MCDL, CGG sells goods in the ordinary course of business.
1. CGG owns and sells seismic data.
There is no dispute that CGG owns the seismic data it licenses through
its MCDL. (2.RR.123-24; 5.RR.D.Ex.36, p.13, 17, 19). The Comptroller also
does not dispute that CGG’s licensing of seismic data constitutes a “sale.”
See TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 442 (Tex.
2011) (because the revenues from licensing seismic data derive from
50
conveyance and use of the underlying data, whereas the license itself is not a
“revenue-producing asset,” the transaction constitutes a “limited sale” of
property)12; see also Avis v. First Nat. Bank of Wichita Falls, 174 S.W.2d
255, 258 (Tex. 1943) (“This Court has definitely declared that an oil and gas
lease is the same as a sale of real estate.”).
2. The seismic data is a “good” for purposes of the COGS
deduction.
The only dispute regarding CGG’s qualification as an “actual owner” is
whether the products sold by CGG satisfy the relevant definition of “goods.”
See Appellants’ Brief, p. 25-41. CGG qualifies because the seismic data that
it intends to license for mass distribution without substantial alteration
through its MCDL satisfies a unique definition of “goods” applicable only to
the COGS deduction. See id. § 171.1012(a)(3)(A)(ii).
“Goods” are defined to mean “real or tangible personal property sold in
the ordinary course of business of a taxable entity.” Tex. Tax. Code
§ 171.1012(a)(1); see also 34 Tex. Admin. Code § 3.588(b)(3) (same). The
legislature has defined three categories of property that shall be treated as
“tangible personal property” exclusively for purposes of the COGS deduction:
12 The tax issue involved in TGS-NOPEC was “apportionment.” See Tex. Tax Code
§ 171.103. Although the nature of the transaction (i.e., the licensing of seismic data)
should be consistently construed as a “sale” of property for purposes of both the COGS
deduction and apportionment, the nature of the property is treated differently for these
two purposes, as explained below.
51
(a) In this Section: . . .
(3)(A) “Tangible personal property” means:
(i) personal property that can be seen,
weighed, measured, felt, or touched or that is
perceptible to the senses in any other manner;
(ii) films, sound recordings, videotapes, live and
prerecorded television and radio programs, books, and
other similar property embodying words, ideas,
concepts, images, or sound, without regard to the
means or methods of distribution or the medium in
which the property is embodied, for which, as costs are
incurred in producing the property, it is intended or is
reasonably likely that any medium in which the
property is embodied will be mass-distributed by the
creator or any one or more third parties in a form that is
not substantially altered; and
(iii) a computer program, as defined by Section
151.0031.
Tex. Tax Code § 171.1012(a)(3)(A)(i)-(iii); see also 34 Tex. Admin. Code
§ 3.588(b)(10)(A) (same). By using the language “In this Section”, the
statute confined this specialized definition of ‘[t]angible personal property’
to Section 171.1012. In doing so, it excluded all other forms of (i) intangible
property and (ii) services as being outside the definition of “goods” for
purposes of the COGS deduction. Tex. Tax Code § 171.1012(a)(3)(B); see also
34 Tex. Admin. Code § 3.588(b)(10)(B) (same).
52
The first category covers property that is traditionally thought of as
“tangible”: items that “can be seen, weighed, measured, felt,” etc. Tex. Tax.
Code § 171.1012(a)(3)(A)(i). Neither party argues that CGG’s seismic data
satisfies the first category.13
The second two categories cover property that is, in reality,
“intangible” (i.e., not of physical form). Id. § 171.1012(a)(3)(A)(ii)-(iii).
Nevertheless, for the particular tax purpose of allowing a COGS deduction,
our Legislature has chosen to specially define or treat these specific types of
intangible property as “tangible personal property” (TPP). (See 3.RR.106).
It is a legal fiction employed to serve a special purpose—the allowance of a
deduction for high-cost industries important to the State that do not
otherwise produce traditionally “tangible” products. As such, categories (ii)
and (iii) constitute “artificial TPP” solely for purposes of the COGS
deduction. See TGS-NOPEC, 340 S.W.3d at 443 & n.11 (noting that Texas
legislature and other state legislatures are able to and have chosen to identify
certain types of intangible property for specialized tax treatment).
13 Consequently, the outcome of this case is not controlled by American Multi-
Cinema, Inc. v. Hegar, No. 03-14-00397-CV, --S.W.3d --, 2015 WL 1967877, *6 n.4
(Tex. App.—Austin Apr. 30, 2015, no. pet. h.).
53
a. TPP for COGS is different than TPP for sales tax or
apportionment.
It is important to understand the distinctions between TPP as defined
for purposes of (1) the COGS deduction versus (2) the Texas sales and use tax
and (3) the franchise tax code’s apportionment provision, which also employ
the term “tangible personal property.” See Tex. Tax Code § 151.009,
§ 171.103. The Comptroller overlooks these distinctions and improperly
conflates authorities interpreting the relevant statutes.
This matters for two reasons. First, the authorities relied on by the
Comptroller to characterize CGG’s seismic data as “intangible” are based on
sales tax or apportionment principles and, thus, do not control for purposes
of the COGS deduction. See Appellants’ Brief, p.32-34. Second, the Court
should be aware of the implications of characterizing property as “tangible”
or “intangible” under these various statutes. Generally speaking, sales of
“tangible” personal property are subject to sales tax, and revenues from such
sales are apportioned by the location of use for franchise tax purposes, while
sales of “intangible” property are not subject to sales tax, and their revenues
are apportioned by the location of payor. See TGS-NOPEC Geophysical Co,
v. Combs, 340 S.W.3d 432 (Tex. 2011). Because CGG has pending
administrative claims regarding its apportionment factor, the Court’s
discussion and holdings here should be limited to the treatment of CGG’s
54
seismic data for purposes of the COGS deduction and not inadvertently
result in an advisory opinion about its treatment for apportionment
purposes.
The definitions of “goods” and “tangible personal property” in Section
171.1012(a) are expressly limited to application “in this section.” Comptroller
representative Sarah Pai agreed that “in this section” as used in Section
171.1012(a) refers exclusively to the COGS provision and not to the franchise
tax code generally. (4.RR.P.Ex.46, p.120-21). She unequivocally agreed that
the phrase “in this section” “confine[s] the[] definitions [provided under
Section 171.1012(a)] to Section 171.1012 and [they] don’t extend into the
apportionment rule.” (Id., p.128). On this basis, Pai further agreed that “if
an item qualifies . . . as tangible personal property under (ii) of Section
171.1012[(a)(3)(A)], it is still correct to apportion that as an intangible, the
sale of an intangible because the words ‘in this section’ confine the scope of
those definitions to that Section 171.1012.” (Id., p.128-29).
For purposes of sales tax, TPP is defined as “property that can be seen,
weighed, measured, [etc.]” and “includes a computer program and a
telephone prepaid calling card.” Tex. Tax Code § 151.009. Thus, the
definition overlaps with categories (i) and (iii) of TPP under the COGS
55
definition but notably leaves out category (ii), regarding the intellectual
property at issue here.
The apportionment provision does not define TPP. See Tex. Tax Code
§ 171.103. However, the legislative history indicates a parallel treatment of
TPP for purposes of sales tax and apportionment, distinct from the
treatment of TPP for COGS purposes. The apportionment rules have
remained largely unchanged since their amendment in 1997—a date when
the Texas sales tax existed but vastly pre-dating the 2006 enactment of the
current franchise tax. Because apportionment does not impact the
calculation of one’s tax base, no major changes were made to that provision
when the Legislature adopted the margin/franchise tax.
Considering that (1) the COGS provision did not even exist until a
decade after the current apportionment provision was enacted, (2) no
relevant change was made to apportionment upon adoption of the COGS
provision, and (3) the legislature expressly limited the definition of TPP for
purposes of COGS—it is not logical to conclude that the legislature intended
for the meaning of TPP for apportionment purposes to be the same as for
COGS purposes. Rather, it is more logical to interpret the meaning of TPP in
the apportionment and sales tax rules consistently, with the important
56
distinction for COGS purposes being the intellectual property described by
Section 171.1012(a)(3)(A)(ii).
Under this analysis, CGG agrees that for purposes of sales tax and
apportionment—which do not include “sound recordings, film, . . . and other
similar property” in their definitions of TPP—its seismic data should be
treated as “intangible” property. See TGS-NOPEC, 340 S.W.3d at 444.
However, that does not prevent the seismic data from qualifying as a “good”
for purposes of the COGS deduction because the Legislature chose to treat
this specific type of otherwise intangible property as a form of “artificial
TPP” exclusively for this purpose, and CGG’s seismic data satisfies the
applicable definition.
b. CGG’s seismic data satisfies the definition in Section
171.1012(a)(3)(A)(ii).
Section 171.1012(a)(3)(A)(ii) treats “films, sound recordings, . . . and
other similar property” (i.e., intellectual property that is otherwise
intangible) as an artificial form of TPP for purposes of the COGS deduction.
CGG’s seismic data satisfies each element of the (A)(ii) definition because:
(1) seismic data is the type of intellectual property described therein; and (2)
at the time CGG incurs the costs to produce the data, CGG intends to mass
distribute it (3) in a form that is substantially unaltered, regardless of the
57
means or methods of distribution or the medium in which it is distributed.
See Tex. Tax Code § 171.1012(a)(3)(A)(ii).
First, CGG’s seismic data falls within the statute’s broad definition of
intellectual property. The Legislature provided an expansive list, drafted in
non-exclusive terms, of the types of property that qualifies, described by
both type and characteristic: “films, sound recordings, videotapes, live and
prerecorded television and radio programs, books, and other similar
property embodying words, ideas, concepts, images, or sound.” CGG’s
seismic data is “similar” to the described types of visual and sound
recordings, which convey unique information that could not be organically
duplicated by another creator.
The Comptroller claims that CGG’s seismic data “is nothing like the
items listed” because it lacks “esthetic, narrative, musical, or artistic value.”
Appellants’ Brief, p.40. This aligns with the Comptroller’s trial argument
that the property had to be “creative” and could not be “scientific” to qualify
under Section 171.1012(a)(3)(A)(ii). (3.RR.120; 4.RR.P.Ex.46, p.149, 158).
Nothing in the statute expressly or impliedly limits the definition in the
manner sought by the Comptroller. And, as the Comptroller’s counsel
acknowledged regarding this theory, “I can’t prove it. I don’t have a
precedent for you.” (3.RR.154). Moreover, this argument would disqualify
58
producers of documentaries from claiming the COGS deduction. Nothing in
the language of the statute supports such a narrow reading.
Second, the record demonstrates that CGG intends to mass distribute
the seismic images at the time it incurs the costs to produce them. CGG does
not even consider undertaking the expense of funding the production of
seismic images for purposes of the MCDL unless there is substantial interest
by E&P companies for the geological information of a particular location.
(2.RR.118, 121; 4.RR.P.Ex.18; 5.RR.D.Ex.14, p.16: “In developing our multi-
client data library, we carefully select survey opportunities in order to
maximize our return on investment.”). The entire purpose of CGG incurring
these costs is to sell the data to “as many people as possible,” including all
12,000 of the Texas companies registered in the oil and gas drilling industry.
(2.RR.118-20, 125; 3.RR.13, 17, 20; 4.RR.P.Ex.18; 4.RR.P.Ex.25;
5.RR.D.Ex.35, p.8, 12-13, 16-17). Comptroller representative Pai admitted
that the “mass distribution” requirement is satisfied by a taxpayer’s intent to
mass distribute, not its ability to actually do so: She agreed a taxpayer would
qualify if it “intended to sell to as many people as possible [but] no one
bought it.” (4.RR.P.Ex.46, p.157). On this record, the Comptroller cannot
satisfy his burden of demonstrating that there is “no evidence” to support
59
Findings of Fact 12-13, especially when the evidence is viewed in favor of the
judgment. See City of Keller v. Wilson, 168 S.W.3d 802, 807 (Tex. 2005).
The Comptroller defines “mass” as “a large number of individuals,” yet
claims CGG’s intent to license its MCDL products to all 12,000 industry
members is not enough. To the extent this argument is based on a belief that
a taxpayer must intend to distribute its product to masses “of the general
public” rather than a specific industry, this argument fails. Nothing in the
statute provides such a limitation, and it is easy to understand how it would
not be true for many types of niche musical or artistic products that the
Comptroller admits qualify under Section 171.1012(a)(3)(A)(ii).14
The Comptroller’s remaining two “mass distribution” complaints are
red herrings. Appellants’ Brief, p.38. First, just as discussed in regard to
why CGG’s activities are sufficiently connected to drilling projects, the
statute does not require a taxpayer to maintain accounting records and parse
its costs based on the timing or success of a project. This argument should
be rejected because it ignores the economic realities of CGG’s business.
14 The Comptroller argues that CGG’s sales to proprietary customers do not satisfy
the “mass distribution” prong. Appellants’ Brief, p.37. CGG has never argued that it
qualifies as an “actual owner” of goods based on its proprietary sales. But contrary to
the Comptroller’s argument, this does not provide a basis to reverse the judgment. It is
only necessary that CGG qualify to claim the COGS deduction under subsection (i) as an
actual or deemed owner of goods based on some aspect of its business. Then, as a
combined group making a single election for which deduction method to apply, CGG is
entitled to deduct all of its allowable costs. Infra, Argument IV.B.
60
Supra, Argument III.A.2. Second, the Comptroller’s claim that “[o]ne would
not expect data . . . regard[ed] as a ‘trade secret’ to be mass distributed”
misses the point.15 CGG’s MCDL products are sold on a non-exclusive basis
to whomever will pay for them. Just because the purchaser is prohibited
from re-distributing those products (as is the purchaser of a copy of any
movie, song, or image described by this section) does not show a lack of
intent for the owner/seller of the product to mass-distribute it for profit.
Third, CGG intends to distribute the data in a form that is substantially
unaltered. Here, it is critical to understand the difference between altering
the underlying data versus providing that data by various means or on
various mediums. The underlying data (originally captured as sound waves
from the earth’s surface) never changes. Only its format changes. By
applying algorithms and other techniques to interpret the underlying data,
CGG is able to make that same data (originally captured as a sound
recording) appear in the medium of a high-resolution image.
This is no different than taking the underlying text of a Shakespeare
play, originally written with ink and paper, and reprinting it for sale as a
hardback book, and then as a digital version, or performing it as a play, or
15 The Comptroller cites a case regarding a discovery dispute over the production of
seismic data in a legal dispute, which is readily-distinguishable and has nothing to do
with the treatment of such property as “tangible” or “intangible” for tax purposes. See
In re Bass, 113 S.W.3d 735 (Tex. 2003).
61
making it into a movie. The underlying content of Shakespeare’s work
remains substantially unaltered regardless of the medium or means of
distribution, and he (or his heirs or assignees) remain the owners of that
underlying intellectual property.
The statute expressly provides that a product will qualify as artificial
TPP under Section 171.1012(a)(3)(A)(ii) “without regard to the means or
methods of distribution or the medium in which the property is embodied,”
and that the distribution can be intended in “any medium in which the
property is embodied.” Comptroller representative Pai confirmed the
purpose of the statute is to allow the taxpayer to distribute the product
“through as many means as are - - are profitable to the distributer.”
(4.RR.P.Ex.46, p.67; see also p.138-139 (agreeing that this was a reasonable
interpretation as shown by 4.RR.P.Ex.34)).
Based on the foregoing, the record sufficiently supports the conclusion
that the seismic data products sold through CGG’s MCDL are “goods” or
“artificial TPP” within the definition of Section 171.1012(a)(3)(A)(ii). As
such, the Legislature has placed these products outside of the definition of
“intangible property” for purposes of the COGS deduction.
62
IV. ALL OF CGG’S COSTS ARE ALLOWED FOR THE COGS DEDUCTION.
Once a taxpayer qualifies as an actual or deemed owner of goods under
Section 171.1012(i), it is instructed to calculate its total costs of goods sold as
allowed “by this section,” including all of the direct and indirect costs
allowed for deduction under subsections (c), (d), and (f). That is exactly the
computation CGG performed to arrive at its COGS deduction of $567
million. The trial court correctly concluded that CGG was entitled to claim
the COGS deduction in this full amount. (CR.250-51, 268 at COL.8-9).
For the first time on appeal, the Comptroller seeks to parse these costs
between CGG’s lines of business (proprietary and MCDL), its activities
(acquisition and processing), and/or the assorted categories of allowable
costs under subsections (c), (d), and (f). Recognizing that it failed to
preserve these arguments at trial, the Comptroller seeks a remand for a
second bite at the apple to parse the amount of CGG’s deduction. Not only
has this argument been waived, it is also legally incorrect and inconsistent
with recent policy announced by the Comptroller.
A. The Comptroller Waived Any Challenge to the Actual Costs
Deducted.
CGG provided evidence that classified all of the costs included in its
COGS deduction into each of the categories allowed under Texas Tax Code
63
Sections 171.1012(c), (d), and (f). (3.RR.40-41, 48-52, 54-56; 4.RR.P.Ex.19,
48). The Comptroller limited its opposition to a holistic challenge of
whether CGG qualified for the COGS deduction under Section 171.1012(i).
The Comptroller preserved no argument that, assuming CGG qualifies, the
specific costs included in its COGS calculation are not allowed for deduction
(in whole or in part) under Section 171.1012(c), (d), or (f). (See 2.RR.16
(Comptroller’s counsel conceded that he was “not even fighting [CGG] on [its
costs], except as to whether they’re eligible for [the COGS deduction of]
them.”); 3.RR.58-63, 91-98 (Comptroller’s counsel asked no questions of
relevant witnesses to challenge the allowance of specific costs under
subsections (c), (d), or (f)); 3.RR.98; 4.RR.P.Ex.3, p.P000128 (Comptroller’s
auditor agreed that he “did not challenge any of the categories or the
amounts that are reflected on [CGG’s COGS calculation spreadsheet]”);
CR.41-66 (Comptroller’s trial brief raises no challenge to allowance of
specific costs under subsections (c), (d), or (f))).
Thus, the Comptroller has waived any challenge to which of CGG’s
costs should be included in the calculation. The only question before this
Court is the threshold issue of whether CGG qualified for the COGS
deduction. Assuming that the Court agrees that CGG qualifies as an actual
or deemed owner under Section 171.1012(i), then it should affirm the
64
judgment in full allowing CGG the full amount of its COGS deduction. There
is no legitimate basis for a remand in this circumstance.
B. The Statute Does Not Require Parsing of Costs.
The Comptroller agrees that taxpayers who qualify for the COGS
deduction as “actual owners” may deduct any of the costs allowed by (c), (d),
and (f). Appellants’ Brief, p. 44-45. However the Comptroller argues that
taxpayers who qualify as “deemed owners” should be treated differently
under the same provision. Id., p.19, 43-49 (arguing that deemed owners are
entitled to deduct only their “labor and material costs” and not the
remainder of costs allowed by subsections (c), (d), and (f)). This contravenes
the plain language of the statute and ignores the Comptroller’s own
admissions at trial.
Regarding both “actual” and “deemed” owners, Section 171.1012(i)
plainly states that the taxpayer may subtract the costs as provided “by” or
“under” “this section.” Tex. Tax Code § 171.1012(i), first and third sentences.
The reference to “this section” must mean the entirety of Section 171.1012
because the Legislature did not say “subsection,” which it knew how to do if
that is what had been intended. See generally Tex. Tax Code § 171.1012
(containing 12 separate references to “subsections”).
65
The Comptroller’s auditor, Gary Dullum, agreed that “as allowed by
this section” means all of the costs under (c), (d), and (f). (3.RR.72-73). The
Comptroller’s prior letter rulings also support this interpretation.
(4.RR.P.Ex.28, ¶ 4: explaining that the taxpayer is entitled to deduct all costs
allowed by 171.1012(c), (d), and (f), not just labor and material costs;
4.RR.P.Ex.32: in regard to a deemed owner, explaining that “Section
171.1012(c), (d), and (f) lists the types of costs included in the COGS
deduction for all types of businesses.”).
Additionally, nothing in the statute requires parsing of costs between
business lines or activities. Instead, the taxpayer simply must qualify by
some portion of its business activity to elect the COGS deduction under
subsection (i), and then it may calculate all of the costs allowed by
subsections (c), (d), and (e). This is equally true for single businesses as it is
for integrated companies like CGG and Newpark, which report their taxes on
a combined group basis, making a single election for the calculation method
used. As this Court explained:
[I]t would be inconsistent [with the statutory purpose]
to treat subsection 171.1014(e)(1) [regarding combined
reporting] as an additional substantive limitation that
would require each member’s business activity to be
viewed in complete isolation from the combined group.
This conclusion is directly supported by subsection
171.1014(d–1), which states that “[a] member of a
combined group may claim as costs of goods sold those
66
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.” As this provision
indicates, a member that does not sell any goods itself
may nevertheless deduct as cost of goods sold those
expenses it incurs to sell goods owned by another
member of the combined group. . . .
It would be inconsistent with this framework to
consider a combined group as a single taxable entity,
require each member to take the same general
deduction, but nevertheless treat each member as an
isolated entity for purposes of determining eligibility to
take the cost-of-goods-sold deduction. This conclusion
would lead to the absurd result that a company that had
no subsidiaries could take all costs-of-goods-sold
deductions allowable under section 171.1012, but if that
same company created subsidiaries it could potentially
lose substantial cost-of-goods-sold deductions because
each subsidiary might not sell goods in the ordinary
course of its business.
Newpark, 422 S.W.3d at 52 (internal citations omitted) (emphasis added).
Finally, the Comptroller’s position that the includable costs are limited
to only those associated with particular business activities is belied by his
recent public pronouncement that businesses incurring research costs may
deduct them as COGS even if the taxpayer doesn’t produce any of the goods
it sells. See Texas Comptroller of Public Accounts, Letter Ruling
201504069L (April 23, 2015) (STAR document available at
http://aixtcp.cpa.state.tx.us/opendocs/open32/201504069l.html).
67
V. NO DEFERENCE IS OWED TO THE COMPTROLLER’S POSITIONS.
As a default argument throughout his brief, the Comptroller contends
that this Court must defer to his positions either because the Comptroller is
charged with enforcement of the tax code or because the COGS deduction is
an “exemption” rather than an “exclusion.” Both arguments lack merit.
“[A] precondition to deference to an agency’s interpretation of a statute
is ambiguity.” Am. Multi-Cinema, Inc. v. Hegar, No. 03-14-00397-CV, --
S.W.3d --, 2015 WL 1967877, *3-4 (Tex. App.—Austin Apr. 30, 2015, no. pet.
h.) (citing Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632,
635 (Tex. 2013) (describing agency-deference doctrine)). Section 171.1012 is
not ambiguous, so no deference is owed to the Comptroller’s positions.
Newpark, 422 S.W.3d at 56 n.9.
In any event, such deference is not required where the agency’s
interpretation “is plainly erroneous or inconsistent” with the controlling
statute. Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632, 635
& n.10 (Tex. 2013); USA Waste Servs., Inc. v. Strayhorn, 150 S.W.3d 491,
494 (Tex. App.—Austin 2004, pet. denied). Consequently, this Court need
not defer to the Comptroller’s flawed interpretations of Section 171.1012.
Finally, the Comptroller incorrectly asserts that this Court should
interpret the COGS deduction as an exemption from tax and, on that basis
68
hold CGG to stricter rules of construction and a higher burden of proof. The
COGS deduction is not an exemption. It is a method used to arrive at
“margin,” the tax base adopted by the legislature, which is akin to an
“exclusion.” “Exemptions,” on the other hand, make special reductions to
that base after it is calculated (allowing a taxpayer to avoid paying the tax
completely). These are specifically identified and treated separately in the
code. See Tex. Tax Code §§ 171.051-.088. Because the same concerns of
equality and uniformity do not arise with exclusions and deductions as they
do with exemptions, the stricter rules applicable to exemptions should not be
imposed on taxpayers claiming exclusions or deductions. Instead, this Court
should construe the COGS deduction strictly against the Comptroller and
liberally in favor of CGG, and require CGG to prove its entitlement by a
preponderance of the evidence. See Am. Multi-Cinema, 2015 WL 1967877,
at *3; Roark Amusement & Vending, L.P. v. Combs, 2011 WL 255535 (Tex.
App.—Austin Jan. 26, 2011), aff’d by 422 S.W.3d 632 (Tex. 2013).
In urging otherwise, the Comptroller relies on an overly-broad
interpretation of Upjohn Co. v. Rylander, 38 S.W.3d 600, 606 (Tex. App.—
Austin 2000, pet. denied). Upjohn involved the former “earned surplus tax,”
which is fundamentally different than the current “margin tax.” The
taxpayer in Upjohn sought a special deduction, imposed after the calculation
69
of the tax base, which would have allowed it to avoid tax for food and health
care supplies. Id. at 605. This was properly treated as an exemption. To the
contrary, the COGS deduction, as a component of the tax-base calculation for
all taxpayers, should be treated as an “exclusion.”
PRAYER
Based on the foregoing, Appellee CGG Veritas Services (U.S.), Inc.
respectfully prays that this Court overrule each of the Comptroller’s issues
and affirm the judgment in full.16 CGG further prays that this Court tax all
costs against Appellees, in this Court and the court below, and award CGG
any such other relief at law or equity to which it may be justly entitled. Tex.
R. App. P. 43.4; Tex. R. Civ. P. 139.
16 There is no legitimate basis to remand this case to allow the Comptroller a new
opportunity to attempt to parse the costs properly included in CGG’s COGS calculation.
However, should a remand be ordered, CGG preserves its rights to present argument
and evidence in support of its calculation.
70
Respectfully submitted,
MARTENS, TODD, LEONARD, TAYLOR & AHLRICH
301 Congress Ave., Suite 1950
Austin, Texas 78701
Telephone: (512) 542-9898
Telecopier: (512) 542-9899
By: /s/ Amanda G. Taylor
Amanda Taylor
ataylor@textaxlaw.com
State Bar No. 24045921
James F. Martens
jmartens@textaxlaw.com
State Bar No. 13050720
Lacy L. Leonard
lleonard@textaxlaw.com
State Bar No. 24040561
Danielle V. Ahlrich
dahlrich@textaxlaw.com
State Bar No. 24059215
ATTORNEYS FOR APPELLEE
CGG VERITAS SERVICES (U.S.), INC.
CERTIFICATE OF COMPLIANCE
I hereby certify that this Appellee’s Brief complies with the typeface
requirements of Tex. R. App. P. 9.4(e) because it has been prepared in a
conventional typeface no smaller than 14-point for text and 12-point for
footnotes. This document also complies with the word-count limitations of
Tex. R. App. P. 9.4(i) because it contains 14,696 words, excluding any parts
exempted by Tex. R. App. P. 9.4(i)(1).
/s/ Amanda G. Taylor
Amanda Taylor
71
CERTIFICATE OF SERVICE
Pursuant to the Texas Rules of Appellate Procedure, a true and correct
copy of the foregoing was served via e-service on counsel listed below, on the
20th day of July, 2015. Tex. R. App. P. 9.5.
Joseph D. Hughes
Assistant Solicitor General
OFFICE OF THE ATTORNEY GENERAL P.O.
Box 12548 (MC 059)
Austin, Texas 78711-2548
(512) 936-2923
(512) 474-2697 [fax]
jody.hughes@texasattorneygeneral.gov
Charles Eldred
Assistant Attorney General
OFFICE OF THE ATTORNEY GENERAL,
FINANCIAL AND TAX LITIGATION DIVISION
P.O. Box 12548
Austin, Texas 78711
(512) 463-1745
(512) 477-2348 [fax]
charles.eldred@texasattorneygeneral.gov
/s/ Amanda G. Taylor
Amanda Taylor
72
APPX.1 (P.Ex.4)
APPX.1 (P.Ex.4)
APPX.1 (P.Ex.4)
APPX.1 (P.Ex.4)
APPX.1 (P.Ex.4)
APPX.1 (P.Ex.4)
APPX.1 (P.Ex.4)
APPX.2 (P.Ex.5)
APPX.2 (P.Ex.5)
APPX.2 (P.Ex.5)
APPX.2 (P.Ex.5)
APPX.2 (P.Ex.5)
APPX.2 (P.Ex.5)
APPX.3 (P.Ex.19)
APPX.3 (P.Ex.19)
APPX.3 (P.Ex.19)
APPX.3 (P.Ex.19)
APPX.3 (P.Ex.19)
APPX.4 (P.Ex.48)
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012
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(a) In this section:
(1) “Goods” means real or tangible personal property sold in the ordinary course of business of a taxable entity.
(2) “Production” includes construction, installation, manufacture, development, mining, extraction, improvement, creation,
raising, or growth.
(3)(A) “Tangible personal property” means:
(i) personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any
other manner;
(ii) films, sound recordings, videotapes, live and prerecorded television and radio programs, books, and other similar
property embodying words, ideas, concepts, images, or sound, without regard to the means or methods of distribution or
the medium in which the property is embodied, for which, as costs are incurred in producing the property, it is intended
or is reasonably likely that any medium in which the property is embodied will be mass-distributed by the creator or
any one or more third parties in a form that is not substantially altered; and
(iii) a computer program, as defined by Section 151.0031.
(B) “Tangible personal property” does not include:
(i) intangible property; or
(ii) services.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012
(b) Subject to Section 171.1014, a taxable entity that elects to subtract cost of goods sold for the purpose of computing its
taxable margin shall determine the amount of that cost of goods sold as provided by this section.
(c) The cost of goods sold includes all direct costs of acquiring or producing the goods, including:
(1) labor costs;
(2) cost of materials that are an integral part of specific property produced;
(3) cost of materials that are consumed in the ordinary course of performing production activities;
(4) handling costs, including costs attributable to processing, assembling, repackaging, and inbound transportation costs;
(5) storage costs, including the costs of carrying, storing, or warehousing property, subject to Subsection (e);
(6) depreciation, depletion, and amortization, reported on the federal income tax return on which the report under this chapter
is based, to the extent associated with and necessary for the production of goods, including recovery described by Section
197, Internal Revenue Code;
(7) the cost of renting or leasing equipment, facilities, or real property directly used for the production of the goods, including
pollution control equipment and intangible drilling and dry hole costs;
(8) the cost of repairing and maintaining equipment, facilities, or real property directly used for the production of the goods,
including pollution control devices;
(9) costs attributable to research, experimental, engineering, and design activities directly related to the production of the
goods, including all research or experimental expenditures described by Section 174, Internal Revenue Code;
(10) geological and geophysical costs incurred to identify and locate property that has the potential to produce minerals;
(11) taxes paid in relation to acquiring or producing any material, or taxes paid in relation to services that are a direct cost
of production;
(12) the cost of producing or acquiring electricity sold; and
(13) a contribution to a partnership in which the taxable entity owns an interest that is used to fund activities, the costs of
which would otherwise be treated as cost of goods sold of the partnership, but only to the extent that those costs are related to
goods distributed to the taxable entity as goods-in-kind in the ordinary course of production activities rather than being sold.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012
(d) In addition to the amounts includable under Subsection (c), the cost of goods sold includes the following costs in relation
to the taxable entity's goods:
(1) deterioration of the goods;
(2) obsolescence of the goods;
(3) spoilage and abandonment, including the costs of rework labor, reclamation, and scrap;
(4) if the property is held for future production, preproduction direct costs allocable to the property, including costs of
purchasing the goods and of storage and handling the goods, as provided by Subsections (c)(4) and (c)(5);
(5) postproduction direct costs allocable to the property, including storage and handling costs, as provided by Subsections
(c)(4) and (c)(5);
(6) the cost of insurance on a plant or a facility, machinery, equipment, or materials directly used in the production of the
goods;
(7) the cost of insurance on the produced goods;
(8) the cost of utilities, including electricity, gas, and water, directly used in the production of the goods;
(9) the costs of quality control, including replacement of defective components pursuant to standard warranty policies,
inspection directly allocable to the production of the goods, and repairs and maintenance of goods; and
(10) licensing or franchise costs, including fees incurred in securing the contractual right to use a trademark, corporate plan,
manufacturing procedure, special recipe, or other similar right directly associated with the goods produced.
(e) The cost of goods sold does not include the following costs in relation to the taxable entity's goods:
(1) the cost of renting or leasing equipment, facilities, or real property that is not used for the production of the goods;
(2) selling costs, including employee expenses related to sales;
(3) distribution costs, including outbound transportation costs;
(4) advertising costs;
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012
(5) idle facility expense;
(6) rehandling costs;
(7) bidding costs, which are the costs incurred in the solicitation of contracts ultimately awarded to the taxable entity;
(8) unsuccessful bidding costs, which are the costs incurred in the solicitation of contracts not awarded to the taxable entity;
(9) interest, including interest on debt incurred or continued during the production period to finance the production of the
goods;
(10) income taxes, including local, state, federal, and foreign income taxes, and franchise taxes that are assessed on the
taxable entity based on income;
(11) strike expenses, including costs associated with hiring employees to replace striking personnel, but not including the
wages of the replacement personnel, costs of security, and legal fees associated with settling strikes;
(12) officers' compensation;
(13) costs of operation of a facility that is:
(A) located on property owned or leased by the federal government; and
(B) managed or operated primarily to house members of the armed forces of the United States; and
(14) any compensation paid to an undocumented worker used for the production of goods. As used in this subdivision:
(A) “undocumented worker” means a person who is not lawfully entitled to be present and employed in the United States;
and
(B) “goods” includes the husbandry of animals, the growing and harvesting of crops, and the severance of timber from
realty.
(f) A taxable entity may subtract as a cost of goods sold indirect or administrative overhead costs, including all mixed service
costs, such as security services, legal services, data processing services, accounting services, personnel operations, and general
financial planning and financial management costs, that it can demonstrate are allocable to the acquisition or production of
goods, except that the amount subtracted may not exceed four percent of the taxable entity's total indirect or administrative
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012
overhead costs, including all mixed service costs. Any costs excluded under Subsection (e) may not be subtracted under this
subsection.
(g) A taxable entity that is allowed a subtraction by this section for a cost of goods sold and that is subject to Section 263A,
460, or 471, Internal Revenue Code, may capitalize that cost in the same manner and to the same extent that the taxable entity
capitalized that cost on its federal income tax return or may expense those costs, except for costs excluded under Subsection
(e), or in accordance with Subsections (c), (d), and (f). If the taxable entity elects to capitalize costs, it must capitalize each cost
allowed under this section that it capitalized on its federal income tax return. If the taxable entity later elects to begin expensing
a cost that may be allowed under this section as a cost of goods sold, the entity may not deduct any cost in ending inventory
from a previous report. If the taxable entity elects to expense a cost of goods sold that may be allowed under this section, a
cost incurred before the first day of the period on which the report is based may not be subtracted as a cost of goods sold. If
the taxable entity elects to expense a cost of goods sold and later elects to capitalize that cost of goods sold, a cost expensed
on a previous report may not be capitalized.
(h) A taxable entity shall determine its cost of goods sold, except as otherwise provided by this section, in accordance with the
methods used on the federal income tax return on which the report under this chapter is based. This subsection does not affect
the type or category of cost of goods sold that may be subtracted under this section.
(i) A taxable entity may make a subtraction under this section in relation to the cost of goods sold only if that entity owns the
goods. The determination of whether a taxable entity is an owner is based on all of the facts and circumstances, including the
various benefits and burdens of ownership vested with the taxable entity. A taxable entity furnishing labor or materials to a
project for the construction, improvement, remodeling, repair, or industrial maintenance (as the term “maintenance” is defined
in 34 T.A.C. Section 3.357) of real property is considered to be an owner of that labor or materials and may include the costs,
as allowed by this section, in the computation of cost of goods sold. Solely for purposes of this section, a taxable entity shall
be treated as the owner of goods being manufactured or produced by the entity under a contract with the federal government,
including any subcontracts that support a contract with the federal government, notwithstanding that the Federal Acquisition
Regulation may require that title or risk of loss with respect to those goods be transferred to the federal government before the
manufacture or production of those goods is complete.
(j) A taxable entity may not make a subtraction under this section for cost of goods sold to the extent the cost of goods sold
was funded by partner contributions and deducted under Subsection (c)(13).
(k) Notwithstanding any other provision of this section, if the taxable entity is a lending institution that offers loans to the public
and elects to subtract cost of goods sold, the entity, other than an entity primarily engaged in an activity described by category
5932 of the 1987 Standard Industrial Classification Manual published by the federal Office of Management and Budget, may
subtract as a cost of goods sold an amount equal to interest expense. For purposes of this subsection, an entity engaged in
lending to unrelated parties solely for agricultural production offers loans to the public.
(k-1) Notwithstanding any other provision of this section, the following taxable entities may subtract as a cost of goods sold
the costs otherwise allowed by this section in relation to tangible personal property that the entity rents or leases in the ordinary
course of business of the entity:
(1) a motor vehicle rental or leasing company that remits a tax on gross receipts imposed under Section 152.026;
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012
(2) a heavy construction equipment rental or leasing company; and
(3) a railcar rolling stock rental or leasing company.
(k-2) This subsection applies only to a pipeline entity: (1) that owns or leases and operates the pipeline by which the product
is transported for others and only to that portion of the product to which the entity does not own title; and (2) that is
primarily engaged in gathering, storing, transporting, or processing crude oil, including finished petroleum products, natural
gas, condensate, and natural gas liquids, except for a refinery installation that manufactures finished petroleum products from
crude oil. Notwithstanding Subsection (e)(3) or (i), a pipeline entity providing services for others related to the product that the
pipeline does not own and to which this subsection applies may subtract as a cost of goods sold its depreciation, operations,
and maintenance costs allowed by this section related to the services provided.
(k-3) For purposes of Subsection (k-2), “processing” means the physical or mechanical removal, separation, or treatment of
crude oil, including finished petroleum products, natural gas, condensate, and natural gas liquids after those materials are
produced from the earth. The term does not include the chemical or biological transformation of those materials.
(l) Notwithstanding any other provision of this section, a payment made by one member of an affiliated group to another member
of that affiliated group not included in the combined group may be subtracted as a cost of goods sold only if it is a transaction
made at arm's length.
(m) In this section, “arm's length” means the standard of conduct under which entities that are not related parties and that have
substantially equal bargaining power, each acting in its own interest, would negotiate or carry out a particular transaction.
(n) In this section, “related party” means a person, corporation, or other entity, including an entity that is treated as a pass-
through or disregarded entity for purposes of federal taxation, whether the person, corporation, or entity is subject to the tax
under this chapter or not, in which one person, corporation, or entity, or set of related persons, corporations, or entities, directly
or indirectly owns or controls a controlling interest in another entity.
(o) If a taxable entity, including a taxable entity with respect to which cost of goods sold is determined pursuant to Section
171.1014(e)(1), whose principal business activity is film or television production or broadcasting or the distribution of tangible
personal property described by Subsection (a)(3)(A)(ii), or any combination of these activities, elects to subtract cost of goods
sold, the cost of goods sold for the taxable entity shall be the costs described in this section in relation to the property and
include depreciation, amortization, and other expenses directly related to the acquisition, production, or use of the property,
including expenses for the right to broadcast or use the property.
(p) to (s) [Blank].
(t) If a taxable entity that is a movie theater elects to subtract cost of goods sold, the cost of goods sold for the taxable entity shall
be the costs described by this section in relation to the acquisition, production, exhibition, or use of a film or motion picture,
including expenses for the right to use the film or motion picture.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012
Credits
Added by Acts 2006, 79th Leg., 3rd C.S., ch. 1, § 5, eff. Jan. 1, 2008. Amended by Acts 2007, 80th Leg., ch. 1282, §§ 14,
15, eff. Jan. 1, 2008; Acts 2013, 83rd Leg., ch. 1232 (H.B. 500), § 9, eff. Jan. 1, 2014; Acts 2013, 83rd Leg., ch. 1232 (H.B.
500), § 10(a), eff. Sept. 1, 2013.
Notes of Decisions (1)
V. T. C. A., Tax Code § 171.1012, TX TAX § 171.1012
Current through Chapters effective immediately through Chapter 46 of the 2015 Regular Session of the 84th Legislature
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
§ 171.1012. Determination of Cost of Goods Sold, TX TAX § 171.1012
Editor's and Revisor's Notes (8)
HISTORICAL AND STATUTORY NOTES
2015 Main Volume
Acts 2007, 80th Leg., ch. 1282 in subsec. (a)(3)(A)(ii) inserted “live and prerecorded television and radio
programs” following “videotapes,”, substituted “, without regard to the means or methods of distribution or the
medium in which the property is embodied,” for “by the creator of the property” following “or sound”, and deleted
“tangible” preceding “medium in which the property is embodied”; in subsec. (c)(6) inserted “reported on the
federal income tax return on which the report under this chapter is based,”; rewrote subsec. (g); in subsec. (h)
substituted “used on the federal income tax return on which the report under this chapter is based” for “permitted
by federal statutes and regulations”; rewrote subsec. (k); and added subsec. (o). Prior thereto subsecs. (g) and
(k) read:
“(g) A taxable entity that is allowed a subtraction by this section for a cost of goods sold and that is subject to
Section 263A , 460 , or 471, Internal Revenue Code , shall capitalize that cost in the same manner and to the
same extent that the taxable entity is required or allowed to capitalize the cost under federal law and regulations,
except for costs excluded under Subsection (e), or in accordance with Subsections (c), (d), and (f). ”
“(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 may subtract as a cost of goods sold an amount
equal to interest expense.”
Acts 2013, 83rd Leg., ch. 1232 (H.B. 500) added subsecs. (k-2), (k-3), and (t).
Section 10(b) of Acts 2013, 83rd Leg., ch. 1232 (H.B. 500) provides:
“ 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 construed as inconsistent with the law as amended by this section.”
Section 19 of Acts 2013, 83rd Leg., ch. 1232 (H.B. 500) provides:
“This Act applies only to a report originally due on or after the effective date [Sept. 1, 2013] of this Act.”
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
§ 171.103. Determination of Gross Receipts from Business Done..., TX TAX § 171.103
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(a) Subject to Section 171.1055, in apportioning margin, the gross receipts of a taxable entity from its business done in this
state is the sum of the taxable entity's receipts from:
(1) each sale of tangible personal property if the property is delivered or shipped to a buyer in this state regardless of the
FOB point or another condition of the sale;
(2) each service performed in this state, except that receipts derived from servicing loans secured by real property are in this
state if the real property is located in this state;
(3) each rental of property situated in this state;
(4) the use of a patent, copyright, trademark, franchise, or license in this state;
(5) each sale of real property located in this state, including royalties from oil, gas, or other mineral interests; and
(6) other business done in this state.
(b) A combined group shall include in its gross receipts computed under Subsection (a) the gross receipts of each taxable entity
that is a member of the combined group and that has a nexus with this state for the purpose of taxation.
(c) Repealed by Acts 2013, 83rd Leg., ch. 1232 (H.B. 500), § 15.
(d) Repealed by Acts 2013, 83rd Leg., ch. 1232 (H.B. 500), § 15.
Credits
Acts 1981, 67th Leg., p. 1697, ch. 389, § 1, eff. Jan. 1, 1982. Amended by Acts 1984, 68th Leg., 2nd C.S., ch. 31, art. 15, §
1, eff. Oct. 2, 1984; Acts 1991, 72nd Leg., 1st C.S., ch. 5, § 8.06, eff. Jan. 1, 1992; Acts 1997, 75th Leg., ch. 1185, § 5, eff.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
§ 171.103. Determination of Gross Receipts from Business Done..., TX TAX § 171.103
Jan. 1, 1998; Amended and consolidated this section with V.T.C.A., Tax Code § 171.1032 by Acts 2006, 79th Leg., 3rd C.S.,
ch. 1, § 5, eff. Jan. 1, 2008; Acts 2007, 80th Leg., ch. 1282, § 20, eff. Jan. 1, 2008; Acts 2013, 83rd Leg., ch. 1232 (H.B. 500),
§ 15, eff. Jan. 1, 2014.
Notes of Decisions (49)
V. T. C. A., Tax Code § 171.103, TX TAX § 171.103
Current through Chapters effective immediately through Chapter 46 of the 2015 Regular Session of the 84th Legislature
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
§ 171.103. Determination of Gross Receipts from Business Done in..., TX TAX § 171.103
Editor's and Revisor's Notes (36)
HISTORICAL AND STATUTORY NOTES
2015 Main Volume
Acts 2006, 79th Leg., 3rd C.S., ch. 1 rewrote this section, which prior thereto read:
Ҥ 171.103. Determination of Gross Receipts From Business Done in This State for Taxable Capital
“In apportioning taxable capital, the gross receipts of a corporation from its business done in this state is the sum
of the corporation's receipts from:
“(1) each sale of tangible personal property if the property is delivered or shipped to a buyer in this state
regardless of the FOB point or another condition of the sale, and each sale of tangible personal property shipped
from this state to a purchaser in another state in which the seller is not subject to taxation;
“(2) each service performed in this state;
“(3) each rental of property situated in this state;
“(4) the use of a patent, copyright, trademark, franchise, or license in this state;
“(5) each sale of real property located in this state, including royalties from oil, gas, or other mineral interests; and
“(6) other business done in this state.”
Acts 2007, 80th Leg., ch. 1282 added subsecs. (c) and (d).
Section 38 of Acts 2007, 80th Leg., ch. 1282 provides:
“This Act applies only to a report originally due on or after the effective date [Jan. 1, 2008] of this Act.
“The legislature intends that each change in law made to the following sections of the Tax Code by this Act be
considered as a clarification of existing law and not imply that the existing law may be construed as inconsistent
with the law as amended by this Act:
“(2) 171.103(5);”
Acts 2013, 83rd Leg., ch. 1232 (H.B. 500), repealed subsecs. (c) and (d), which prior thereto read:
“(c) A taxable entity that is a combined group shall include in a report 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 Subsection (a); and
“(2) the gross receipts computed under Subsection (a) that are subject to taxation 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 reporting requirement prescribed by Subsection (c). ”
Section 19 of Acts 2013, 83rd Leg., ch. 1232 (H.B. 500) provides:
“This Act applies only to a report originally due on or after the effective date of this Act [Jan. 1, 2014]. ”
Prior Laws:
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
§ 171.103. Determination of Gross Receipts from Business Done in..., TX TAX § 171.103
Acts 1907, 30th Leg., 1st C.S., p. 503.
Rev.Civ.St.1911, art. 7393.
Acts 1919, 36th Leg., p. 100.
Acts 1930, 41st Leg., 5th C.S., p. 220, ch. 68, § 2.
Acts 1931, 42nd Leg., p. 441, ch. 265, § 1.
Acts 1941, 47th Leg., p. 269, ch. 184, art. 8, § 1.
Acts 1949, 51st Leg., p. 975, ch. 536, § 1.
Acts 1951, 52nd Leg., p. 695, ch. 402, § 9.
Acts 1954, 53rd Leg., 1st C.S., p. 3, ch. 2, art. 3, § 1.
Acts 1955, 54th Leg., p. 1080, ch. 404, art. 4, § 1.
Acts 1957, 55th Leg., p. 1179, ch. 394, § 1.
Vernon's Ann.Civ.St. art. 7084 .
Acts 1959, 56th Leg., 3rd C.S., p. 187, ch. 1.
Acts 1969, 61st Leg., 2nd C.S., ch. 1, art. 7, § 1.
V.A.T.S. Tax.-Gen. art. 12.02, § (1)(b).
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
§ 151.009. “Tangible Personal Property”, TX TAX § 151.009
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“Tangible personal property” means personal property that can be seen, weighed, measured, felt, or touched or that is perceptible
to the senses in any other manner, and, for the purposes of this chapter, the term includes a computer program and a telephone
prepaid calling card.
Credits
Acts 1981, 67th Leg., p. 1547, ch. 389, § 1, eff. Jan. 1, 1982. Amended by Acts 1984, 68th Leg., 2nd C.S., ch. 31, art. 6, § 2, eff.
Oct. 2, 1984; Acts 1987, 70th Leg., 2nd C.S., ch. 5, art. 1, pt. 4, § 11; Acts 1997, 75th Leg., ch. 1040, § 16, eff. Sept. 1, 1997.
Notes of Decisions (9)
V. T. C. A., Tax Code § 151.009, TX TAX § 151.009
Current through Chapters effective immediately through Chapter 46 of the 2015 Regular Session of the 84th Legislature
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
§ 151.009. “Tangible Personal Property”, TX TAX § 151.009
Editor's and Revisor's Notes (6)
HISTORICAL AND STATUTORY NOTES
2015 Main Volume
Prior Laws:
Acts 1941, 47th Leg., p. 269, ch. 184, art. 10, § 1.
Acts 1950, 51st Leg., 1st C.S., p. 10, ch. 2, art. 10, § 1.
Vernon's Ann.Civ.St. arts. 7047l, §§ 1, 1a, 1 1/2 ; 7047 l -1, § 1.
Acts 1959, 56th Leg., 3rd C.S., p. 187, ch. 1, arts. 20.01 to 20.20.
Acts 1961, 57th Leg., 1st C.S., p. 71, ch. 24, art. 1, § 1.
V.A.T.S. Tax.-Gen. art. 20.01, § (P).
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
250
251
265
266
267
268
269
270
/>7D[7\SH )UDQFKLVH@>'RFXPHQW7\SH /HWWHU0HPR@ KWWS DL[WFSFSDVWDWHW[XVRSHQGRFVRSHQ OKWPO
Texas Comptroller of Public Accounts STAR System
201406920L
DATE: June 10, 2014
TO: Denise Stewart, Audit Division
Robin Robinson, General Counsel
FROM: Teresa Bostick, Tax Policy Division
SUBJECT: Policy change based on TITAN and NEWPARK
ISSUE
Based on the courts’ language and analysis in TITAN and NEWPARK, we are
revising the policy with regard to subcontracting payments eligible for
exclusion under Section 171.1011(g)(3) and qualifying activities for the COGS
deduction under Section 171.1012(i).
BACKGROUND
The court in TITAN found that Titan Transportation, L.P. (Titan), which is in
the business of hauling, delivering, and depositing aggregate at real property
construction sites, was entitled to exclude from revenue, pursuant to Section
171.1011(g)(3), payments the taxpayer made to its subcontractors providing this
service for its customers.
Newpark Resources, Inc. (Newpark), an oil field service business, was the
reporting entity for a combined group which included its subsidiary, Newpark
Environmental Services, L.L.C. (NES). The court in NEWPARK found that Newpark
was entitled to take a COGS deduction under Section 171.1012(i) for NES’s
activities of removal and disposal of waste materials from oil and gas well
drilling sites.
REVISED POLICY
This change has immediate effect and a taxable entity may file an amended
franchise tax report for years that are open within the statute of limitations.
Section 171.1011(g)(3) states, “A taxable entity shall exclude from its total
revenue…only the following flow-through funds that are mandated by contract to
be distributed to other entities: subcontracting payments handled by the
taxable entity to provide services, labor, or materials in connection with the
actual or proposed design, construction, remodeling, or repair of improvements
on real property or the location of the boundaries of real property.”
Under the revised policy, subcontracting payments which qualify as flow-through
funds under Section 171.1011(g) because they are mandated by contract to be
distributed to other entities, and have a reasonable nexus to the actual or
proposed design, construction, remodeling, or repair of improvements on real
property or the location of boundaries of real property, may be excluded from
revenue pursuant to Section 171.1011(g)(3). A payment is mandated by contract
to be distributed to other entities if the taxable entity has a contract with
RI 30
201406920L [Tax Type: Franchise] [Document Type: Letter/Memo] http://aixtcp.cpa.state.tx.us/opendocs/open32/201406920l.html
its customers providing that subcontractors may be used and payment to the
subcontractors, if used, must be made from the funds paid to the taxable
entity. Please keep in mind that TITAN is being appealed on the basis that
there was no contract in effect involving flow-through funds because the funds
at issue were not mandated by contract to be distributed to other entities.
Instead, the contract at issue was an ordinary contract between two parties for
the provision of services in the regular course of business, as described in
Section 171.1011(i).
With regard to the COGS deduction, Section 171.1012(i) states, “A taxable
entity furnishing labor or materials to a project for the construction,
improvement, remodeling, repair, or industrial maintenance of real property is
considered to be an owner of that labor or materials and may include the costs,
as allowed by this section, in the computation of costs of goods sold.”
Under the revised policy, we are expanding the interpretation of what is
considered to be furnishing labor or materials to a project for the
construction, improvement, remodeling, repair, or industrial maintenance of
real property and will no longer require an entity to actually physically touch
the property or make a change to the property to qualify for the COGS
deduction, regardless of whether the entity is furnishing the labor or
materials to a member of the entity’s combined group or if the entity is a
single entity filer.
The policy changes are similar for both Sections 171.1011(g)(3) and
171.1012(i), but there are slight differences in how the policy will apply to
the respective sections. For instance, the policy for both Sections will
permit industries such as transportation companies delivering aggregate and
other similar materials to a construction site, waste removal companies,
demolition companies, and inspectors, among others, to claim either an
exclusion from revenue – provided the transaction meets the contractual
requirement of flow-through funds – or a COGS deduction. Although not new, one
slight difference between the Sections is that Section 171.1011(g)(3) uses the
term “proposed” – absent from Section 171.1012(i) – which may permit costs for
activities performed by architects and engineers to qualify as exclusions from
revenue, without regard to whether construction occurs.
Costs considered too far removed from the construction, improvement,
remodeling, repair, or industrial maintenance of real property do not qualify
for either an exclusion from revenue or a COGS deduction. Entities providing
services that are defined as “service costs” under Rule 3.588(b)(9) are too far
removed and do not qualify for either an exclusion from revenue or a COGS
deduction. Examples of these costs include legal services and accounting
services.
Further, the revised policy does not change the treatment of taxable entities
renting or leasing equipment to others for use in or during such projects.
Section 171.1012(k-1) still limits the COGS deduction to taxpayers renting or
leasing certain items to others. Taxpayers who rent or lease equipment other
than heavy construction equipment, such as fencing or port-a-potties, to others
for use in projects for the construction, improvement, remodeling, repair or
industrial maintenance of real property, are not eligible for the COGS
deduction under Section 171.1012.
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ACCESSION NUMBER: 201406920L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 06/18/2014
TAX TYPE: Franchise
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Texas Comptroller of Public Accounts STAR System
201504069L
Date: April 23, 2015
To: Denise Stewart, Director, Audit Division
From: Teresa Bostick, Director, Tax Policy Division
Subject: Tax Code Section 171.1012(c)(9) - Cost of Goods Sold for
Research, Experimental, Engineering, and Design Activities
Issue
Whether a taxable entity that is not the producer of goods it sells, because it
contracts out the manufacturing of the product, can include in costs of goods
sold (COGS) expenses for research, experimental, engineering, and design
activities related to those products.
Relevant Authorities
Texas Tax Code Section171.1012(c)(9) Internal Revenue Code Section 174 Treas.
Regs. Section1.174-1 through 1.174-4
Discussion
Tax Code Section171.1012(c)(9) states, “the cost of goods sold includes all
direct costs of acquiring or producing goods, including costs attributable to
research, experimental, engineering, and design activities directly related to
the production of the goods, including all research or experimental
expenditures described by Section 174, Internal Revenue Code (IRC).”
Under prior policy COGS deductions for a taxable entity that was not the
producer of the goods were limited to acquisition, storage, handling, and other
costs specified in Tax Code Section171.1012(c) and (d) not related to
production. Costs directly related to the production of goods that were
typically allowed to a producer, such as research, experimental, engineering,
and design activity costs, were not allowed as a COGS deduction for a taxable
entity that was not the producer of the goods.
Upon further review, Tax Policy determined that a taxable entity who is
eligible for COGS may claim as COGS all research and experimental costs
described by Section 174 of the IRC, regardless of whether the taxable entity
is considered the producer of the goods.
Section 174 of the IRC does not define research and experimental costs;
however, related Treas. Reg. Section1.174-2 does provide a definition of
research and experimental expenditures. Treas. Reg. Section1.174-2(a)(1)
states, “The term research or experimental expenditures, as used in section
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201504069L [Tax Type: Franchise] [Document Type: Letter/Memo] http://aixtcp.cpa.state.tx.us/opendocs/open32/201504069l.html
174, means expenditures incurred in connection with the taxpayer’s trade or
business which represent research and development costs in the experimental or
laboratory sense.” Treas. Reg. Sections1.174-2(a)(1)-(2) also describe what
costs are generally included in the term research and experimental expenditures
and “…includes all such costs incident to the development or improvement of a
product.”
Based on these authorities, regardless of whether the taxable entity is the
producer of the good or not, the taxable entity may include in its COGS
deduction research, experimental, engineering, and design activity costs,
including all research or experimental expenditures described by Section 174 of
the IRC relating to goods it sells.
This policy is effective for all open periods within the statute of limitations
and future periods.
ACCESSION NUMBER: 201504069L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 04/24/2015
TAX TYPE: Franchise
2 of 2 7/20/2015 3:37 PM
Merriam-
Webster's
Collegiate'
Dictionary
Er-EVENTH
EoITIoN
Merriam-'Webster, Incorporated
Springfield, Massachusetts, U.S.A.
mat • maths 765
. provide wl1h n mn l or 1nn1- 8 Yll ~IATB RIAI.,, Pll VSICAI., COl\l'Ollll/\J.., l'llRNOMRN/\L, SS:NStlJ Lll, OD·
1 10 mcrrva menn o f or bclon~lng tt> uo1unl lty. MAT!lRIAL Imp lies' form11-
g vi ( 1549) . (dirt nml fillh 11w11etl hor h nlr)
·-" tfl•I•tl n cnnalcddlll~ mass,...,, vi: 10 become mn11ud llon out or tnnglble mnllcr: u,cd In cont rnsf with .vplrl111aJ or lclvlll it
1114 ,...•,11, 1n11•1 • rorrn" • 16()~) 1 a/.>'O matte '" matt : ro may connote tl1c mu ndano. crnss. or gn.,ping (mmerlol value$).
· n ..i_~. ~ol·lln9 < 11; 2 : 10 provide ( a pic1u rc) wilh
t
' ..,.,.1
.,...
.,, sJllSS·
r color)"'"
0
PHYSICAi. applies to whBI Is perceived dlrcolly by l hc senses nod may
<:-Ont.rast with nHmt11/, ~plrlt1wl. or lma11/11m·y (tht phy.i-lcal benents or
exercise). CORPOlll!AI. Implies h11vinri 1ho t1tnglble qWllliJcs or n body
' . cd surface. fr, mat, ndj. - more at such 3!C shape, size. or rcsblnn~1 role a.n, (r OEgcm:ecca mhle, cqunl: akin 10 oe or Independent cxlstcncc a1»1n from I\ subJtct perccrving II (no ob}ee·
1•·'\M6 ml1C' Id, KP.) {b~f l.2e) 1 a : n pen.on nr thin& tfre evidence or domage). syn sec lu ndtlltion R£J.l!VANT
h\~ _ n1ore •I M~ 0 ;10 nbl~ to c;ope with nnother c : nn 2
m a lerlal 11 (1556) 1 o ( I ): the clement<, cons1ituents, or ~ubstn nccs or
jj., 111 ~·"!1 11t1cr lrbsuitnbly nssoclntcd
goll
" 11 • ""~1cst bo b . a cun1es1 (11~ In lennl,~ or volleybull)
(r1 qunlllles which give II ln clivldunllty Md [)y Whlcli fl m ny be Clltegol'lwtl
(sUok y "') (e1q, Josivc ""''') I> (I) : Romcl hl n~ (ns d.'ltn) Ih ut 11111y be
- ~II ,ho111!1 1~ "'"',.~or side wins 11 ~P•~il'lcd 1\11111bcr ur sctNor worked lllto 11 mo rQ rtnl&hed form <-
ror n h1ogropf)y) (2) : so1\1c-
-l1tlit11 llllC p UY"'1on b: n pro~rectlvc partner In mnrrioi~ thlng 11soo
for or m mJc lhc object or s 1udy <-
for t he next sc111QSlc 1')
u. J 111orrlllB0<1~~ou
11
nior ~ucees~lully ns nn oJJt ngonJst b I) (3) : 11 t>er fo r mer's rcpcrl(llrc (!\ Ctlmcdln11's ->
c: M/\'rl'llR 3b d
1 ~1 1 11 : > >OSillon (2) : \o provide with a won 1y : Cl.O'nt e : a per~-011 1K>lt11l1111ly s u i1cd 10 ~ome pursuit (vnr:slty ->
' ..1111Jl'lllll0•11 ~ ~,f~•rl 2 o : ap pnrt1IU$ 110CCSS.'lry for doing or making wmc•
c: to ~c: ~sse..slns 'equni or harmon izin g nttribu1cs (2) th ing (writin g -..v) b : MATlll(ll.ll,
rut In" 'IC \c1. srni• (--| Cplnlnlld as mnnlfestotloM or resuh>
ri colllrlbulion - 0 . J. Miller) 4 . 10 Ot together or of maucr b : n doc1rlno: thnt the only or the hialtest Vlllucs or objec-
·~>{.:;. nuina 1<>11c1hcr 5 a : to Olp or toss (colM) and com- tives Uc In ruatcrilll wcll-bclna ond in lhc (urthcrnnco: of ntJllcriul
;.,.{rotu b : to 1os~ coins with - »f: to be a countct'llart - progress c : n doctdn" thnt economic or social change Is matc1iully
\'m 3 -cha-b.>I\ 1ttf/ - m atc h·e r " cnu,;ed - compare IUSTORICAI. MATt!RlALISM 2 : 8 preoccup111ion
IMll rnllCt'li~. m<'<'t:ll~ cnncllewick. fr. AF '?'ec~e) (IS49) 1 : :• wit h or stress u.p 0n matcrlol rather 1hnn intellectual or :.plrllual thing~
il rciiared \\lck or Ctlblc 1nlKt u rc thnt bur:m into nnmc w hen 5llghtly at(/- ma te rl a l S·tl·cal·IY \·tl·k(;>·)le\ ad•
0 0 0 0
1hrou~h friction ens by being scrntchcd ngainSl tl rt'>ugll 'urfnce) ma le rl a l·l·tY \m~·,llr-6·'n·l~-t~\ 1>, pf-ties (LS70l 1 : t he q uali ty or
0 0 0
boarll \'mnch· ,h6rd\ 11 (en. sta le or~b~ln1:1 m:ucdnl 2: som ethlny thut I&material
tbMrdwllh u aroove cuc ~ ma te·ri ·Bl·l·zo tlon \ma.,1lr-e-;1·l~·'z.i-sho11\ 11 (1 843) 1 : Ille ncllon o r
..
0 0
e.1110 nnd 11 tonsuc idong ~ m:ucrinlizlng or beoomln11 111111erlnli1.cd 2 : something that h ns been
mnu::l'lnllzed; CS/> : AJ>l'AJU'rlON
'"Hlf!l111llnrly
w "'' 10 r11 cut ~nugly wll h ~ ~ ma•IO•rl·ol·ize \m:.-' Ur-e-a-,lii\ vh · b:od; · l:r:-lng vt (17HI) 1 a : to
bonrds
k \·,bi'J k\ II ( 1937) : II r mnk'c nmlcrlnl : OllrllCTl l'V b : to cau>0 to appear in bodily form <-
folder co111nlnlng ruws o r matchbos d me spirits o r lbc dead) 2 : to cause to be rnaicrlnlistic - vi 1 : to as-
.....~ht<. sume bodily fom1 2 o : 10 ap1iear esp. ~uddenly b : to come into ex.-
x hbftk'\ 11 (17861 : 11 box for matchc• isrcnc" - ma te·ri al·lz o r 110 0 0
·llu \-l;a\ mV (c:n. 1$30) : havin g no equal : FBBRJ..I!~~ (a ...... m o terlals science 11 ( 19$6): lhc scle11110c s1udy of tbe properties ond
Ith< »•ll•Y) - motch·loss·IY atlv 11pplh:alions of mlllcrlals or construction or Dl3Uufacture (as cemml~.
k \·,H\k\ n (ca. 1637) 1 : a muskel equipped with a mc1111$, p0lymen;, nnd com1><>5ltes) - m a terials s cientis t 11
k 2 : a slow-burning m atch lowered over a bole In the m o •te·rla med·l·c a \m:>-'tlr-C·:>·'me·dl·k~\ n CNL. Iii .. mcdiettl matlcr]
ol a mlbkot to Ignite the charge (1663) 1 : sut»tancc.~ used In the compo.'ltlon or mlldical remcdl~
koer \·,mA·k•r\ n (1638) : one thnt arrnnges n match: esp : 011.uos. !l>tl!:DIO.NJl 2 a : a branch of medlcal science tlmt dents wilh
"ho •rlcs lo bring two unn1orrkd individuals to(lclhcr In an at· t he sources. nature, proponleo<, an d 11reparat lon o f dru gs b : a trea tise
JO f'OtnOte 11 marriage - m a lch·mak·f ng \·k lo\ 11 on matc:ria. medica
~I V ~ (1893): golf compctl1ion in which 1hc wh111cr Is the per· ma.te.rl·el or ma-te·rl·el \m~·,tir--!-'el\ n [F materiel, fr. materiel. adJ.J
r•m Wlru1h1a tho srentcr number or hol es - compare S'rllOKB (1819): equipment. apparatws, a nd supplies used hy an organi:>:.ation o r
institution
11f:lnl '[ ( 1?2 1\: ti Sltunllon (ns in tCJmls) In which One plflyer or me tor nol \mo-'t~r-n•t\ oq/ (M B, fr. M P & M I.; MF matcm el. fr. M L
0 0
.J.1)~~ t\,i e mn1ch by wlnnl1111 1he 11ex1 point: lllso : the point Itself m aramnlls, fr. L 11111t(fr1111.t( rr.
11111ter mo1 hcr - more at Mo1·1m11.J (I Sc)
i·til, ~ mach·,~tJk\ 11 ( .179 1) ·1 : n slender f>iccc ~~fl· o f wood 1 : ()f, reln llng to, belo ng 118 to, or c h11m etcrlslic o( Q m o thur: M01'1<-
n\to~~n 111ntuh I~ mode 2: somclhlng rese mbling n mn1ch31lck lll:n .Y 2 a : rolutcd through 11 m o ther (Ill~ ....., aunt) b : ln h orllcd ot
•Up \ trn,e., (QUI n carrot Into ~s>
•\l/o '~~,, n ,<1959) : ' MATCH
d er ived fro m ll1e fe male p:11·e11t <-
11e11es) - ma ter•nOl•IY \-n• t-C\
0
ad•'
\'m~~ \-,1vud\11 (1786): ~mall pieces of wood : SPUNTeRg 1
me•ter·nl.ty \mo-'1or-n~·tt\ r1.11f-tlas (16 ll ) 1 a : the qu.al.hy or rnuc
~ill vt mot•ed; m o t.Ing [M l3, fr. AF mater, fr. mat, n.• check- of being a moth tr : M011 1nn11000 b : lhc quaUties or " mother
"jl~)· !r· Ar11101(ln .r/Jt//J111<71)) (14c): CHBCKMATI! 2 : MOTllElUJNl!SS 2 : n h ospltnl fociliiy designed for the care of wom-
~ M • CHl!C'KMA1'R I
""'t r~rob, fr. MLO mtili ttkin to OE /l,l'mtrtta guest at one'• ta·
0) ucnoN 2h
mathematlcol loglc 11 (1853): llYMOOt.tc t..001c
math•e-mB·ll•clan \,mntb·m:i-'tl-sh~1! 1 ,nia·lh:>-\ 11 (15c) : a spcd ttllS l
..
.. ,,.
1019 \ 7) llr/t : M l l.OR or eltpcn In ma1hcmnllcs
: a $le llla-t;i-'161, mn1-'l()1\ n [I'. Iii., sailor's wife, fr. rnatelot] (ca. m a th ·fl·mat·lca \ ,mnlh-'mn· llks. ,mn-th:>-\ 11 pl but u.r11 .rl11g 111 co11.11r
r \' "made u:.u. or rish In n seasoned wini; sa u ce (1$73) 1 : the science or numbers and their operations, intcrrdottlon~.
·~~il·tQr\ 11 [L - more at MOTHER] (ca. 1859) clllt;Jly Brit comhlnMion.s. genenallzatlon~. &nd nb!.tmctions and of spn~-e coollHU·
~ ~"1flof,aa \.mA·l~r-fo-'mi·I~. ,ma·\ n [L, fr. mater+ /amilias,
1
mllo11> and their structure, me11.SurCJ11cn1, 1nul3fonnatlo11.-. ~nd gener-
,.~·or/um/flu hou·la·' zA·shon. ,nm-tho-\ /1 (1908) : re-
,
0 0 0
, d · mater/a m atter - more m MATTER] (14c) 1 a (I) : relnt- duction tO mathemttllcal fonn - m o lh•O•m 8 °tlze \'1nal1Hn:>-,tf1, ' m11-
trived from , or consisting qr maUer; esp : ~UYSICAJ.. (lhe ..._ lh:>-\ vb
1; (2): DOJ>ILY <-needs) b (I): of or rol ntlng 10mnt 1cr1111hcr maths \'mat11S\ 11111 (19 1 I) d1fcf/.y Brit: MA1'1t.nMATICS
11
a· ;} (..._. Cl\u~e) (2): or or relating to the su bject mottor or re11· ~J
~t 00 .,, : llMJ•111tCA1. <-
knowled ge) 2 : having n:nl lm1>0rtnncc
nt n1c(111en ccs (fuo1s ...., to die lnvc$1.lga Uo n) 3 a : being o f I\
\a\ ..hut \ 8 \ kitton. F table \ar\ furlher \a\ ll8h \ii\ ace \a\ mop, mar
\au\ out \ch\ chin \e\ bet \ e\ easy \g\ go \l\ hit \i\ lee \j\Jol>
· 1~0r \\1•)1•ldly 11n1111·c b : rcl:11ln11 lo or concerned with physicRl ~
~ ari ~PlrJtunl o r Intellectual things ("'-' progress) - ma te rl· 0 0 \D\ ging \o\ go \6\ law \61\ hoy \lh \ thin \th\ the \il\ loot \u\ foot
i>-IG\ adv - ma·te·rl•al•neaa 11 \y\ yet \:th\ vision, beigo \Is., •. oe, U>, >\.tee Guide lo Pronunciation
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