Austin Court of Appeals Rules in Comptroller’s Favor in Franchise Tax Dispute

by | Jan 10, 2023

The Austin Court of Appeals has upheld a Comptroller rule that governs sourcing of a taxpayer’s gross receipts for purposes of apportioning them to Texas for franchise tax purposes.

NuStar Energy, L.P. v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas; and Ken Paxton, Attorney General of the State of Texas (No. 03-21-00669-CV; filed December 21, 2023) arose from a dispute between NuStar and the Comptroller over the facial validity of 34 TAC § 3.591(e)(29)(A), (C), (H), (e)(32), which the taxpayer asserted violated the apportionment statute, § 171.103(a), Tax Code. Both parties moved for partial summary judgment on that issue. The trial court granted the Comptroller’s motion and denied NuStar’s. The parties and the trial court agreed to a permissive appeal.

The court of appeals affirmed. The specific part of the statute at issue was § 171.103(a)(1), which apportions to tax the proceeds of “each sale of 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.” NuStar contended that the statute means that only proceeds sold to a buyer located in Texas may be apportioned to Texas (“location of buyer,” “ultimate destination,” or “place of market” approach). The Comptroller, on the other hand, argued that the statute applies a so-called “place of transfer” or “location of delivery” rule that disregards where the buyer may be located. The court held that the statute unambiguously states “that sales of tangible personal property are apportioned based on where the property is delivered or shipped,” in other words, “place of transfer.”

NuStar argued further that the court should apply the “last antecedent” canon of statutory interpretation to construe “buyer in this state” to mean “location of buyer.” The court declined to do so because the statute is unambiguous but noted that the outcome would be the same in any event, as adopting NuStar’s construction would render “if the property is delivered or shipped” meaningless. Next, NuStar asserted that since the statute was based on the Multistate Tax Compact and a majority of courts have construed it as “embodying an ultimate destination rule,” the court should do the same. Pointing out that states have gone either way on the issue, despite its supposed “uniformity,” the court declined to adopt that approach. Moreover, the court held, the Multistate Tax Compact does not tie the Legislature’s hands in any way. The court of appeals thus held that the Comptroller’s rules were facially valid.

Pin It on Pinterest

Share This