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On December 22, 2017 the Texas Supreme Court issued an important decision regarding the Texas Franchise Tax in Graphic Packaging Corp. v. Hegar.

Background:                  

Graphic Packaging Corporation sold consumer product packaging throughout the United States, including Texas. As a business entity operating in Texas, Graphic Packaging was subject to the Texas Franchise Tax. To calculate the amount of Franchise Tax Graphic Packaging owed, it used a three factor apportionment formula found in Tax Code § 141.001. Section 141.001 allows the use of a three-factor formula when calculating the tax base for the purposes of an income tax. The three-factor formula consisted of Graphic Packaging’s sales, payroll, and property in Texas over its total sales, payroll, and property in the United States. Graphic Packaging argued that Texas Franchise Tax is analogous to an income tax, and as such the three factor formula—which lowered its taxable amount—was appropriate.

However, the Comptroller argued that the use of a three-factor apportionment formula was prohibited because Texas Tax Code § 171.106 allowed only for the use of single-factor apportionment formula: sales in Texas over total sales in the United States.

Procedure:

Graphic Packaging filed suit in District Court arguing that the Texas Franchise Tax was an income tax. The district court granted summary judgment in favor of the Comptroller and the Court of Appeals affirmed, holding that the Texas Franchise Tax was not an income tax and that the use of a three factor-formula was not appropriate.

Texas Supreme Court’s Decision:

The Texas Supreme Court considered three issues in its review of the appellate court’s decision: (1) whether the Texas Franchise Tax is an income tax, (2) whether Tax Code § 171.106 precludes a taxpayer from using the three-factor formula, and (3) whether Texas’ membership in the Multistate Tax Compact prevents the Texas Legislature from requiring a taxpayer to use only the single-factor formula when apportioning its tax base to Texas.

The Texas Supreme Court elected not to decide whether the Franchise Tax is an income tax. Instead the Court affirmed the appellate court’s holding, favoring the Comptroller, on issues two and three.

First, the Court decided that the text of § 171.106—requiring the use of a single-factor formula— produced an irreconcilable conflict with § 141.001—allowing the use of a three-factor formula. To resolve the conflict, the Court held that statutes passed later in time prevailed over older statutes. The court also held that statutes that were more specific on an issue superseded more general statutes. Section § 171.106 was passed roughly two decades after § 141.001, and it was more specific on how to calculate the tax base for the Franchise Tax, thus § 171.106 controlled.

Next, the Court held that Multistate Tax Compact—which Texas is a member—did not prevent the Texas Legislature from making the single-factor formula the exclusive means of calculating the tax base for the Franchise Tax because it was not a binding regulatory compact.

Doug Sigel and Josh Veith of Ryan Law, LLP have co-written an article that was featured in the August 2017 edition of IPT Insider.

The article is linked below and primarily covers the five bills passed during the 85th Texas Legislative Session, which all affect the Texas franchise tax. To read the IPT Insider August 2017 edition in its entirety, you must register through www.IPT.org.


“The Current State of the Texas Franchise Tax” – IPT Insider, August 2017

Both taxpayers and practitioners should examine these rule changes carefully. These key changes have a significant impact on the procedure aspects of the Texas administrative process. For a full version of the adopted rules discussed below, click here.

34 Texas Administrative Code § 1.4

The Comptroller of Public Accounts adopts amendments to § 1.4, concerning representation and participation. The amendment provides guidance for parties participating in the contested case process and divides the existing language into subparagraphs by related topics.

  • § 1.4 is effective as of July 13, 2017.

34 Texas Administrative Code § 1.8

The Comptroller of Public Accounts adopts amendments to § 1.8, concerning resolution agreements. The amendments update and formalize the procedures by which the parties may fully resolve a contested case by entering into a resolution agreement.

  • § 1.8 is effective as of July 13, 2017.

34 Texas Administrative Code § 1.18

The Comptroller of Public Accounts adopts new § 1.18, concerning filing documents. Existing § 1.18 is adopted for repeal concurrently with this new section. New § 1.18 explains where contested case documents must be filed.

  • §1.18 is effective as of July 13, 2017.

34 Texas Administrative Code § 1.28

The Comptroller of Public Accounts adopts new § 1.28, concerning comptroller’s decisions and orders. The new section implements Senate Bill 1267, 84th Legislature, 2015 with respect to notice of a decision and finality of a decision and order.

  • § 1.28 is effective as of July 13, 2017.

34 Texas Administrative Code § 1.29

The Comptroller of Public Accounts adopts new § 1.29, concerning motion for rehearing. Existing § 1.29 is adopted for repeal concurrently with this new section. The new section implements Senate Bill 1267, 84th Legislature, 2015 and provides additional guidance to assist parties to a contested case in filing a motion for rehearing.

  • § 1.29 is effective as of July 13, 2017.

34 Texas Administrative Code § 1.31

The Comptroller of Public Accounts adopts new § 1.31, concerning computation of time. The new § 1.31 reorganizes information contained in current § 1.31 and provides additional guidance intended to assist parties in timely filing documents during a contested case.

  • § 1.31 is effective as of July 13, 2017.

34 Texas Administrative Code § 1.32

The Comptroller of Public Accounts adopts the repeal of § 1.32, concerning service. The comptroller is adopting a new § 1.32 that will replace the existing section.

  • § 1.32 is effective as of July 13, 2017.

34 Texas Administrative Code § 1.39

The Comptroller of Public Accounts adopts the repeal of § 1.39, concerning dismissal of a case. Existing § 1.39 is adopted for repeal concurrently with this new section. New § 1.39 provides a non-exhaustive list of the grounds upon which a party may file a motion to dismiss.

  • § 1.39 is effective as of July 13, 2017.

34 Texas Administrative Code § 1.41

The Comptroller of Public Accounts adopts the repeal of § 1.41, concerning ex parte communications. Existing § 1.41 is adopted for repeal concurrently with this new section. The new section provides additional guidance regarding ex parte communications. The substance of the existing section is restated and reorganized into separate subsections to improve readability.

  • § 1.41 is effective as of July 13, 2017.

We are pleased to announce the addition of Rich Moore to Ryan Law. Mr. Moore is licensed to practice law in Texas. Mr. Moore will assist in state and local tax controversy matters.

Before joining Ryan Law, Mr. Moore worked at PwC, where he focused his practice on international and mergers & acquisitions tax planning.

Mr. Moore received his Master of Laws from the Georgetown University Law Center, Juris Doctor from the Villanova University Charles Widger School of Law, and Bachelors in Business Administration from the University of Mary Hardin-Baylor.

On January 6, 2017, the Austin Court of Appeals denied the Texas Comptroller’s Motion for Rehearing in American Multi-Cinema, Inc. v. Hegar. The Court’s opinion can be found here. Ryan Law’s Doug Sigel has handled this case at the trial and appellate level. The Court of Appeals ruled in favor of the taxpayer on the issue of whether cost-of-goods sold deduction under the Texas margin tax applies to movie theatre exhibition costs. The opinion on rehearing changes the reasoning of the Court, but not the result.

 

About Ryan Law
Ryan Law is headquartered in Austin, Texas, with offices in Chicago, Houston, and Northern Virginia. Founded by tax and trial lawyers from some of the top law firms in Texas and the nation, the Firm handles a variety of complex tax issues, with an emphasis on all levels of tax recovery, audit defense, and tax appeals for many Fortune 500 companies.

Doug Sigel

Practice Group Leader for Sales and Income Tax

Ryan Law

(512) 459-6611

doug.sigel@ryanlawlllp.com