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Instill Corp. v. Hegar

Court of Appeals of Texas, Third District, Austin

May 31, 2019

Instill Corporation, Appellant
v.
Glenn Hegar, Comptroller of Public Accounts of The State of Texas; and Ken Paxton, Attorney General of The State of Texas, Appellees

          FROM THE DISTRICT COURT OF TRAVIS COUNTY, 126TH JUDICIAL DISTRICT NO. D-1-GN-16-006072, HONORABLE LORA J. LIVINGSTON, JUDGE PRESIDING

          Before Chief Justice Rose, Justices Kelly and Smith

          MEMORANDUM OPINION

          Edward Smith, Justice

         This is a suit for judicial review of a tax assessment levied by the Comptroller of the State of Texas. See Tex. Tax Code § 112.052 (establishing cause of action). Taxpayer Instill Corporation contends the Comptroller incorrectly classified certain online management solutions as "data[-]processing services" subject to sales tax rather than "proprietary information services," which are not subject to that tax. Compare id. § 151.0101(12) (listing data processing among taxable services), with 34 Tex. Admin. Code § 3.342(a)(5)(A) (Tex. Comptroller of Pub. Accounts, Information Services-Nontaxable information services). After a bench trial, the district court rendered a take-nothing final judgment against Instill. We will affirm.

         BACKGROUND

         At issue are certain online management solutions Instill provided to customers in the food-service industry at various periods from 2008 through 2014. As Instill describes it, these solutions varied by customer but typically included information on each customer's procurement, manufacturing, inventory, and sales.[1] To create these customized solutions, Instill would obtain raw data from customers and each customer's vendors and then use its own algorithms to process and present these data in a user-friendly manner intended to "help Instill's customers run their businesses." Instill's customers would then access the solution via a secure website.

         The Comptroller conducted an audit in 2014 and concluded Instill had misclassified its solutions as "proprietary information services" exempt from Texas sales tax and that Instill owed more than $1 million in overdue taxes, penalties, and interest. Instill disagreed with the Comptroller's conclusions but paid the disputed amount under protest and then sued for judicial review of the assessment. See Tex. Tax Code § 112.051 (requiring payment as predicate to judicial review). The district court held a bench trial and ultimately agreed with the Comptroller, holding that "Instill's services are 'data[-]processing services' as provided by Texas Tax Code § 151.0035 and [34] Texas Administrative Code § 3.330(a)(1)." See 34 Tex. Admin. Code § 3.330(a)(1) (Tex. Comptroller of Pub. Accounts, Data Processing Services-Definitions). It further held that "Instill's services are not 'information services' as provided by [34] Texas Administrative Code § 3.342(a)(1)." See id. § 3.342(a)(1) (Tex. Comptroller of Pub. Accounts, Information Services-Definitions). After the Comptroller denied its motion for rehearing, Instill sought judicial review of the Comptroller's conclusions under chapter 112 of the Tax Code. See Tex. Tax Code § 112.052. After a two-day bench trial, the district court rendered final judgment in favor of the Comptroller. On Instill's motion, the court subsequently filed a set of findings and conclusions consistent with the Comptroller's classification of Instill's solutions. Instill timely perfected this appeal.

         DISCUSSION

         The State of Texas imposes sales tax on the conveyance of most information services. See id. § 151.0101(10). There is an exemption, however, for the provision of information services if "the information is of a proprietary nature to that client and may not be sold to others by the person who gathered or compiled the information." See 34 Tex. Admin. Code § 3.342(a)(5)(A) (Tex. Comptroller of Pub. Accounts, Information Services-Nontaxable information services). The State also imposes sales tax on the provision of most data-processing services, defined as "the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information." See Tex. Tax Code § 151.0101(12) (listing data processing among taxable services); 34 Tex. Admin. Code § 3.330(a)(1) (Tex. Comptroller of Pub. Accounts, Data Processing Services-Definitions). These data-processing services are excluded by rule from the definition of information services, see 34 Tex. Admin. Code § 3.342(a)(1) (Tex. Comptroller of Pub. Accounts, Information Services-Definitions), and therefore cannot fall into the exemption afforded to certain proprietary information services.

         Instill contends the evidence before the district court is legally and factually insufficient to support several findings of fact and that the district court misconstrued applicable statutes and regulations by classifying its solutions as data-processing services rather than proprietary information services.[2] We address these arguments in turn.

         Sufficiency of the Evidence

         Although Instill does not challenge the admission of any evidence before the district court, it contends that the record was both legally and factually insufficient to support several findings of fact. "Findings of fact in a case tried to the court have the same force and effect as a jury verdict." GATX Terminals Corp. v. Rylander, 78 S.W.3d 630, 633 (Tex. App.-Austin 2002, no pet.) (citing Catalina v. Blasdel, 881 S.W.2d 295, 297 (Tex. 1994); Starcrest Tr. v. Berry, 926 S.W.2d 343, 352 (Tex. App.-Austin 1996, no writ)). "Likewise, findings of fact are reviewable for factual and legal sufficiency according to the same standards as jury findings." Id. (citing Catalina, 881 S.W.2d at 297). Thus, to prevail on its challenge, Instill "must establish the lack of evidentiary support for these findings." Id. To prevail on its factual-sufficiency challenge, Instill "must demonstrate on appeal that the adverse finding is against the great weight and preponderance of the evidence." Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241 (Tex. 2001) (citing Croucher v. Croucher, 660 S.W.2d 55, 58 (Tex. 1983)). "The final test for legal sufficiency must always be whether the evidence at trial would enable reasonable and fair-minded people to reach the verdict under review." City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex. 2005). "In conducting our review, 'we credit evidence that supports the verdict if reasonable jurors could have done so and disregard contrary evidence unless reasonable jurors could not have done so.'" Graham Cent. Station, Inc. v. Peña, 442 S.W.3d 261, 263 (Tex. 2014) (citing Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. National Dev. & Research Corp., 299 S.W.3d 106, 115 (Tex. 2009)).

         Instill contests the following findings of fact:

8. Instill sold supply chain data management services (the "Solutions") to restaurant and food-and-beverage companies in Texas . . . ...

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