In a case of first impression, the 15th Court of Appeals has held that the federal Anti-Head Tax Act preempts the application of the Texas franchise tax to revenues from an airline’s baggage fees, passenger ticket sales, and freight transportation apportioned to Texas.
Kelly Hancock, Acting Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas v. American Airlines, Inc. (No. 15-24-00113-CV; April 9, 2026) arose from a dispute between the comptroller and American over whether the Texas franchise tax applied to American’s revenues from baggage fees, passenger ticket sales, and freight transportation. In 2014 American filed its franchise tax return under protest, asserting that the federal Anti-Head Tax Act (AHTA) preempted the tax. The comptroller requested an opinion from the U.S. Department of Transportation, which sided with American. Consequently, the comptroller refunded the 2014 tax. America filed under protest again in 2015, seeking a refund of $107,577.04. This time the comptroller responded to recover $1.8 million in additional tax, arguing that American should have included $36 billion of revenue from ticket sales and freight transportation in addition to the $1 billion of baggage fee revenue. The trial court rendered judgment for American. The comptroller appealed.
In an opinion by Justice Field, the court of appeals affirmed. The comptroller argued that the AHTA doesn’t preempt from requiring American to include its transportation revenues in its franchise tax calculations. He also contended that even if the revenue streams from passenger ticket sales and the transportation fees could be isolated, the trial court didn’t have sufficient evidence to find that no deductions or exclusions applied to American’s baggage fee revenue. The upshot of the trial court’s ruling was that the absence of the deductions rendered the franchise tax a tax on American’s gross receipts, the imposition of which is barred by AHTA.
Congress enacted AHTA in 1973 to explicitly bar states and local governments from levying gross receipts taxes from “air commerce or transportation.” Although states may impose other types of taxes on airlines, they “cannot disguise an impermissible gross-receipts tax simply by giving it the label of a permissible tax, a practice that led the courts to address the preemptive scope of AHTA.” For example, in Aloha Airlines, Inc. v. Dir. of Tax’n of Haw., 464 U.S. 7 (1983), SCOTUS held that AHTA preempted Hawaii’s property tax equaling four percent of the annual gross income of airlines. Even the comptroller, in a 2017 administrative proceeding, ruled that AHTA preempted the sales tax as applied to gross receipts from the sale of skydiving jumps (citation omitted), thus “recogniz[ing] that the AHTA’s preemptive scope preempts state taxes—regardless of how they are labeled—if they are imposed on or measured by the gross receipts from air commerce or transportation.”
The comptroller attempted to distinguish Aloha Airlines based on the “composite” nature of the franchise tax, which applies to “a taxable entity’s entire business and levied on a taxable margin.” In other words, taxpayers cannot challenge the franchise tax based on “isolated revenue streams.” He further argued that the tax isn’t measured by or imposed on the gross receipts of American’s transportation revenue, but on American’s “entire business.” He pointed to the fact that the franchise tax isn’t a gross receipts tax because it allows various deductions and exclusions. Unfortunately, as the court pointed out, with regard to the sales tax on sky diving revenue, the comptroller had already conceded that AHTA preempted a tax that allowed deductions and exclusions.
American, on the other hand, responded that on an as-applied basis, the comptroller’s effort to tax its transportation revenues ran afoul of the AHTA. The court rejected the comptroller’s attempt to characterize the tax as a “margin tax,” but that didn’t solve the problem of its application to American’s gross receipts from transportation revenues. As a result, the court ruled that AHTA preempted the franchise tax “insofar as taxable margin is ‘measured by gross receipts’ from” those revenues.
It further held that the trial court had sufficient evidence to support its conclusion that there were no deductions from American’s revenues from passenger ticket sales, passenger baggage fees, and freight transportation. Though the comptroller characterized American’s reporting of gross receipts or sales on its federal return as evidence that American had already deducted the other revenues, the court agreed with American that as far as the franchise tax goes, “total revenue and gross receipts are ‘almost always synonymous.’” The comptroller’s own witness further testified that “she was unaware of any revenue exclusions that specifically applied to American’s transportation revenues.” The court also agreed with the trial court that ample evidence supported the finding that American would pay 70% of its taxable margin after application of the apportionment formula. There was thus no question that the “franchise tax, as applied to American’s transportation revenues in its 2015 franchise-tax report, is a tax on a direct percentage of American’s gross receipts from its apportioned transportation revenues.” The trial court properly ruled that AHTA preempted the tax and affirmed that court’s refund order.
