Texas Franchise Tax Opportunity for Companies Performing Installation Services

A recent court decision could allow auto dealers and other taxpayers who perform installation services to increase their cost of goods sold deduction (“COGS Deduction”) for Texas franchise tax purposes, thereby reducing their future franchise tax liability and also presenting a refund opportunity.

 
On July 22, 2014, a Travis County District Court judge ruled in favor of the taxpayer in Autohaus LP, LLP v. Combs. Texas statutes provide that a taxpayer’s COGS Deduction includes the costs of acquiring or producing goods that a taxpayer sells. At issue in this case was whether an auto dealer could include labor costs related to the installation of new and replacement auto parts in its COGS Deduction. The taxpayer in Autohaus argued that it could include such labor costs because the Texas Tax Code defines “production” to include “installation.” The Comptroller argued that its rule interpreting the tax code limits the definition of installation to include only “installation occurring during the manufacturing or construction process.” The judge ultimately ruled for the taxpayer on the basis that the Comptroller’s rule defining the word “production” for purposes of the COGS Deduction was too narrow and therefore invalid.

 
The Comptroller’s Office still has the opportunity to appeal this decision. Nonetheless, if the Autohaus decision stands, taxpayers who install goods (e.g., auto dealers with service departments) are entitled to include such labor costs in their COGS Deduction. The Autohaus decision also opens up the door for other service department-related costs to be included in the COGS Deduction, such as utilities, insurance, and property taxes associated with the service department. Taxpayers may also file refund claims to include such additional costs in their COGS Deduction on previously-filed franchise tax reports.

 
If you wish to discuss what additional costs you may can include in the COGS Deduction or how to file refund claims, please feel free to contact our Director of State and Local Taxes, Jon Wellington, at (214) 461-1430.