In an important tax decision for the state, the Texas Supreme Court has affirmed an Austin Court of Appeals ruling that upheld a Comptroller rule that governs sourcing of a taxpayer’s gross receipts for purposes of apportioning them to Texas under the franchise tax.
NuStar Energy, L.P. v. Kelly Hancock, Comptroller of Public Accounts of the State of Texas; and Ken Paxton, Attorney General of the State of Texas (No. 24-0037; granted June 13, 2025) 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. NuStar sought review.
In an opinion by Justice Devine, the court affirmed. Looking to the text of the statute, the court opined that “[r]ead syntactically, section 171.103(a)(1) sources sales receipts to Texas when tangible personal property was (1) handed over (2) to a buyer (3) in Texas. A simple, clear, and objectively determinable sales point.” NuStar, however, read “to a buyer in this state” as requiring “the taxpayer and the taxing authority to look beyond the transfer point to determine the buyer’s location for the goods.” The court rejected this interpretation, observing that “[i]f ‘in this state’ were as grammatically constrained as NuStar posits, the action verbs [delivered or shipped] would be mere surplusage. . . . Because we presume the Legislature chose its words with care, we must read the statute to give affect to all its terms and not treat any language as surplusage if possible. Only a point-of-transfer construction does that.” Moreover, the broader statutory context did not support NuStar’s reading, since § 171.103(a)(1) “says nothing about the ‘ultimate’ destination of the property the taxpayer sold; the ‘market’ for that property; or the buyer’s ‘consumption,’ ‘use,’ or other ‘disposition’ of the property.”
NuStar floated the argument that its “ultimate destination” position found support in subsection (a)(1)’s similarity to § 16(a) of the Uniform Division of Income for Tax Purposes Act, which specifies a three-factor apportionment formula. This formula appears in article IV of the 1967 Multistate Compact Act, of which Texas is a member. But, as the court pointed out, no such thing can bind the Legislature if it wants to take another approach. “Here,” the court observed, “NuStar would prefer out statute to be read as encompassing an ultimate-destination theory that alters the ordinary meaning of enacted language. . . . In any event, what is determinative here—and most important—is that our statute’s plain language trumps unstated policy objectives that might be gleaned from extratextual sources.”
Turning to NuStar’s challenge to the validity of the Comptroller’s rules implementing § 171.103, the court concluded that the rules did not rewrite the statute, as NuStar contended. Instead, they were “ultimately consistent with the statute’s place-of-transfer sourcing rule.” Nothing in the rules or in the Comptroller’s example applications of the rule “source receipts from shipments made in Texas to destinations outside of Texas.” As to NuStar’s arguments that the rules contemplate a “carve out” for in-state delivery to a common carrier for out-of-state delivery, the court determined that rather than a carve out, the rules describe “a shipment to a buyer outside this state, and this distinction acknowledges that a sale is not consummated for franchise-tax purposes merely by placing the goods in an intermediary’s hands.” The rules were thus valid.
