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Dallas World Aquarium Corp. v. Hegar

Court of Appeals of Texas, Third District, Austin

June 19, 2019

Dallas World Aquarium Corp., 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 345TH DISTRICT COURT OF TRAVIS COUNTY NO. D-1-GN-15-004255, THE HONORABLE AMY CLARK MEACHUM, JUDGE PRESIDING

          Before Justices Goodwin, Baker, and Kelly

          MEMORANDUM OPINION

          Thomas J. Baker, Justice.

         This is a suit for refund of franchise taxes paid under protest. See Tex. Tax Code § 112.052 (authorizing such suits). After a bench trial, the trial court rendered a take-nothing judgment against the taxpayer, Dallas World Aquarium Corp. (DWA). We will affirm the judgment of the trial court.

         BACKGROUND

         This dispute arises from the Comptroller's franchise-tax audit of DWA's tax report[1] for the reporting years 2009-2012 (calendar years 2008-2011). The State of Texas levies franchise taxes against a taxable entity's "taxable margin," a portion of its total margin. See id. § 171.002(a). The Tax Code allows a taxpayer to calculate its taxable margin as the lesser of: 70% of its total revenue, its total revenue minus $1 million, its total revenue minus the cost of goods sold (COGS), or its total revenue minus certain compensation expenses.[2] See id. § 171.101(a)(1). After a taxpayer determines its taxable margin through one of the allowed methods, it apportions the margin to gross receipts from business done in this State and subtracts other allowable deductions. See id. § 171.101(a)(2), (3). The taxpayer then calculates its franchise tax owed by multiplying the taxable margin by the applicable tax rate. Id. § 171.002(a). DWA determined its taxable margin for the reporting years at issue using the COGS method.

         Before trial, the parties filed agreed stipulations of fact, leaving as the sole issue before the trial court the determination of whether DWA may properly deduct certain expenses as COGS. See id. § 171.1012(a) (defining "goods" for purposes of COGS determination); see also id. § 171.1012(c) ("The cost of goods sold includes all direct costs of acquiring or producing the goods."). DWA operates the Dallas World Aquarium (the Aquarium). Per the stipulations:

• The Aquarium "is a rainforest and nature-based sensory immersion experience."
• "DWA's principal source of revenue [for the disputed period] was from admissions to" the Aquarium.
• "Guests paid for the experience by purchasing admission to or membership in" the Aquarium.

         The stipulations also provided an agreed list of costs that DWA may include in its COGS deduction and agreed tax refunds for the relevant years "[i]f admission to the [] Aquarium is determined to be the sale of 'goods.'" The stipulations framed the dispositive issue thusly: "The parties dispute whether the sale of admissions to the Dallas World Aquarium is the sale of 'goods' such that DWA may include its cost of producing the sensory immersion experience in cost of goods sold."

         At trial, two witnesses for DWA testified: its accountant and one of its biologists. Both witnesses testified at length about the "tangible" and "external" things in the Aquarium- the fish, the birds, the mammals, the plants, the trees, the humidity, the mist. They also testified about how the disputed expenses-including cost of flora, fertilizers, fauna, feed, zoological-staff salaries, maintenance costs and staff wages, water filters, aquarium pumps, and utilities[3]- together provide the "external experience" that DWA is "selling" to visitors through its admission and membership fees.

         After rendering its take-nothing judgment, the trial court issued findings of fact and conclusions of law per DWA's request. The conclusions of law included the following: "DWA's sensory immersion experience was not a 'good' for purposes of the Texas franchise-tax cost-of-goods-sold deduction."

         STANDARD ...


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