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Rent-A-Center, Inc. v. Hegar

Court of Appeals of Texas, Third District, Austin

April 30, 2019

Rent-A-Center, Inc., Appellant
v.
Glenn Hegar, in his capacity as Comptroller of Public Accounts of The State of Texas; and Ken Paxton, in his capacity as Attorney General of The State of Texas, Appellees

          FROM THE DISTRICT COURT OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT NO. D-1-GN-11-001059, HONORABLE LORA J. LIVINGSTON, JUDGE PRESIDING

          Before Chief Justice Rose, Justices Goodwin and Kelly.

          OPINION

          Jeff Rose, Chief Justice.

         Appellant Rent-A-Center, Inc. complains of the trial court's judgment awarding it only a portion of the franchise taxes it paid under protest. Appellees are Glenn Hegar, in his capacity as Comptroller of Public Accounts of The State of Texas, and Ken Paxton, in his capacity as Attorney General of The State of Texas ("the Comptroller"). The sole issue on appeal is whether Rent-A-Center must reduce its cost-of-goods-sold ("COGS") deduction for the merchandise it sold in 2007 by depreciation on that merchandise during the time it was rented prior to sale, as reflected on Rent-A-Center's federal tax return. See Tex. Tax. Code §§ 171.101(a)(1), .1012. Answering that question in the affirmative, we affirm the trial court's judgment.

          Background Summary

         Rent-A-Center provides furniture, electronics, appliances, and computers to consumers, either through immediate, outright purchase or, more commonly, through "rent to own" agreements. Rent-A-Center, Inc. v. Hegar, 468 S.W.3d 220, 221 (Tex. App.-Austin 2015, no pet.). Under the "rent to own" agreements, the customer makes weekly, semi-monthly, or monthly payments over a specified period of time-the average term is eighteen months-and becomes the owner of the merchandise at the end of the term, provided the customer has not terminated or breached the agreement. Id. at 222. The merchandise is sold in an average of approximately twenty months, the average number of rental-purchase agreements after which an item is ultimately sold is three, and the sale price that a customer pays for an item decreases from one rental-purchase agreement to the next for that same item because the item is then considered used. Id. at 224.

         In its 2008 franchise tax report, Rent-A-Center claimed a retailer's COGS deduction that included $562, 966, 741 referred to in Rent-A-Center's documentation as "Rental-Purchase Sales." After an audit, the Comptroller determined that Rent-A-Center was not entitled to a COGS deduction at all, classifying Rent-A-Center as a service provider and not a retail business. Rent-A-Center paid $1, 070, 683.67 in franchise taxes under protest, and then sued, asserting that (1) it should be allowed to take a COGS deduction and (2) it was entitled to its entire asserted COGS deduction, with no reduction for depreciation of the goods prior to sale. On the first issue, the trial court agreed with the Comptroller that Rent-A-Center was not entitled to a COGS deduction at all. On appeal of that ruling, however, this Court disagreed, determining that Rent-A-Center is entitled to a COGS deduction because its business is "more like selling than leasing and that Rent-A-Center is, therefore, primarily engaged in retail trade." Id. at 225. We remanded to the trial court for consideration of the second issue-the proper amount of Rent-A-Center's COGS deduction. Id.

         On remand, Rent-A-Center asserted that it was entitled to a COGS deduction representing the total cost, when new, of all the merchandise it sold in 2007. The Comptroller, on the other hand, asserted that Rent-A-Center was required to adjust its COGS basis to account for the fact that the merchandise at the time of final sale had been rented or used, by subtracting an amount equal to the depreciation Rent-A-Center had claimed on this merchandise in its federal tax return. Following a hearing on the issue, the trial court agreed with the Comptroller and ordered that Rent-A-Center receive a refund of $941, 847.84. It is from that order that Rent-A-Center appeals.[1]

         Standard of Review

         In construing a statute, we seek to ascertain and effectuate the Legislature's intent in enacting the statute. Southwest Royalties, Inc. v. Hegar, 500 S.W.3d 400, 404 (Tex. 2016); Upjohn Co. v. Rylander, 38 S.W.3d 600, 607 (Tex. App.-Austin 2000, pet. denied). "We start with the text because it is the best indication of the Legislature's intent." Ojo v. Farmers Grp., Inc., 356 S.W.3d 421, 435 (Tex. 2011). We examine the language used in the statute, in the context of the entire act, and we read every word, phrase, and expression presuming that the Legislature chose each word for a purpose and purposefully omitted words not chosen. City of Dallas v. TCI W. End, Inc., 463 S.W.3d 53, 55 (Tex. 2015); Upjohn Co., 38 S.W.3d at 607. When a statute is unambiguous, we do not turn to extrinsic aids or canons of construction to construe it-we simply follow the unambiguous language. City of Richardson v. Oncor Elec. Delivery Co., 539 S.W.3d 252, 261 (Tex. 2018); Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632, 635 (Tex. 2013); Ojo, 356 S.W.3d at 435-36.

         If a statute is ambiguous, we will generally defer to the agency's interpretation as long as that interpretation is consistent with the statutory language and not plainly erroneous. Texas Dep't of Ins. v. American Nat'l Ins. Co., 410 S.W.3d 843, 853 (Tex. 2012); TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 438 (Tex. 2011). Our deference, however, is "tempered by several considerations," and we look to whether "(1) the agency's interpretation has been formally adopted; (2) the statutory language at issue is ambiguous; and (3) the agency's construction is reasonable." American Nat'l Ins. Co., 410 S.W.3d at 853-54 (quoting Railroad Comm'n of Tex. v. Texas Citizens for a Safe Future & Clean Water, 336 S.W.3d 619, 625 (Tex. 2011)); see Texas Utils. Elec. Co. v. Sharp, 962 S.W.2d 723, 726 (Tex. App.-Austin 1998, pet. denied).

         The legislature enacted Texas's franchise tax statutes "purely for revenue purposes," and we are to liberally construe the relevant statutes so as to effectuate that purpose. Isbell v. Gulf Union Oil Co., 209 S.W.2d 762, 764 (Tex. 1948) (quoting Federal Crude Oil Co. v. Yount-Lee Oil Co., 52 S.W.2d 56, 61 (Tex. 1932)); Upjohn Co., 38 S.W.3d at 606. A statute that imposes a tax is "strictly construed against the taxing authority and liberally construed in favor of the taxpayer." Upjohn Co., 38 S.W.3d at 606; see Calvert v. Texas Pipe Line Co., 517 S.W.2d 777, 781 (Tex. 1974). An exemption or deduction from tax, however, is disfavored by the law and thus is construed strictly against the taxpayer. North Alamo Water Supply Corp. v. Willacy Cty. Appraisal Dist., 804 S.W.2d 894, 899 (Tex. 1991) (tax exemptions undermine equality and uniformity by placing greater burden on some taxpayers rather than on all taxpayers); Texas Utils. Elec., 962 S.W.2d at 726 ("[T]o promote uniformity and equality in taxation, we construe tax exemptions-and provisions tantamount to tax exemptions-strictly against the taxpayer and in favor of the taxing authority.").

         Discussion

         This case presents a limited question: whether Rent-A-Center is entitled to deduct the full cost of merchandise when new as its asserted COGS, totaling $1, 055, 657, 987, or whether it must reduce that deduction by an amount representing the depreciation during the time Rent-A-Center rented out these assets, see Rent-A-Center, 468 S.W.3d at 224, here represented by the depreciation it reported on its federal ...


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