Court of Appeals of Texas, Sixth District, Texarkana
Submitted: August 1, 2019
Appeal from the 250th District Court Travis County, Texas
Trial Court No. D-1-GN-17-005706.
Morriss, C.J., Burgess and Stevens, JJ.
E. Stevens Justice.
Telecommunications Holding Company (MetTel) appeals the trial
court's take-nothing judgment in its suit to recover $77,
353.70 in franchise taxes paid under protest to Glenn Hegar,
Comptroller of Public Accounts of the State of Texas
(Comptroller). The crux of this appeal turns on whether
MetTel sells tangible personal property. If so, MetTel could
deduct the cost of goods sold (COGS) from its taxable margin
and should recover the franchise taxes paid under protest. If
MetTel instead sells services, the take-nothing judgment in
MetTel's suit against the Comptroller and Ken Paxton,
Attorney General of the State of Texas, was proper.
"sells electrical, light, and radio signals to
customers, who then use those signals to make phone calls or
access the internet." Because we are bound by the
precedent of the Austin Court of Appeals in deciding this
case and that court has determined the sale of
telecommunication products and signals constitutes a
provision of services, we affirm the trial court's
judgment. See NTS Commc'ns, Inc. v.
Hegar, No. 03-16-00771-CV, 2018 WL 2728065, at *2, *4-5
(Tex. App.- Austin June 7, 2018, pet. denied) (mem. op.).
The Trial Court's Application of Franchise Tax
franchise tax is imposed on each taxable entity that does
business in this state or that is chartered or organized in
this state." Tex. Tax Code Ann. § 171.001(a)
(Supp.). The rate of the franchise tax is a set percentage of
the taxable margin. See Tex. Tax Code Ann. §
171.002(a), (b) (Supp.). A taxable entity may elect "to
subtract cost of goods sold for the purpose of computing its
taxable margin." Tex. Tax Code Ann. § 171.1012(b)
(Supp.); see Tex. Tax Code Ann. §
171.101(a)(1)(B)(ii)(a)(1). COGS includes "all direct
costs of acquiring or producing . . . goods." Tex. Tax
Code Ann. § 171.1012(c) (Supp.).
term "goods" refers to "real or tangible
personal property sold in the ordinary course of business as
a taxable entity." Tex. Tax Code Ann. §
171.1012(a)(1) (Supp.). Tangible personal property is what
"can be seen, weighed, measured, felt, or touched or
that is perceptible to the senses in any other manner."
Tex. Tax Code Ann. § 171.1012(a)(3)(A)(i) (Supp.). The
term "'[t]angible personal property' does not
include . . . services." Tex. Tax Code Ann. §
delivers signals through use of telephone lines, copper wire,
and fiber-optic cable. To sell telecommunication signals to
its customers, MetTel leased telephone lines from other
telecommunications companies. MetTel subtracted the costs of
the leases as COGS in computing its taxable margin in four
report years from 2011 to 2014. Following an audit, the
Comptroller disallowed the deduction after concluding that
MetTel did not sell tangible personal property and found that
MetTel owed $77, 353.70 in unpaid franchise taxes for the
four-year period at issue. After paying the assessment under
protest, MetTel filed a taxpayer suit in Travis County
district court. See Tex. Tax Code Ann. §§
question presented to the trial court was whether MetTel sold
tangible personal property or services. The Texas Tax Code
defines "telecommunications services" as "the
electronic or electrical transmission, conveyance, routing,
or reception of sounds, signals, data, or information
utilizing wires, cable, radio waves, microwaves, satellites,
fiber optics, or any other method now in existence or that
may be devised, including but not limited to long-distance
telephone service." Tex. Tax Code Ann. §
151.0103(a). MetTel sought to distance itself from this
terminology by calling itself a "provider of
telecommunications solutions and products."
trial court rejected MetTel's argument, found that it
sold telecommunications services, and ruled that MetTel could
not subtract the COGS since it did not sell tangible personal
property. As a result, the trial court entered a take-nothing
judgment against MetTel.
MetTel's request, the trial court entered findings of
fact and conclusions of law. MetTel challenges the trial
court's conclusion that MetTel sold services, not
tangible personal property, and the findings of fact
supporting its conclusion, because they are unsupported by