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Metropolitan Telecommunications Holding Co. v. Hegar

Court of Appeals of Texas, Sixth District, Texarkana

August 21, 2019


          Date Submitted: August 1, 2019

          On Appeal from the 250th District Court Travis County, Texas Trial Court No. D-1-GN-17-005706.

          Before Morriss, C.J., Burgess and Stevens, JJ.


          Scott E. Stevens Justice.

         Metropolitan 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.

         MetTel "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.[1] 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.).

         I. The Trial Court's Application of Franchise Tax Law

         "A 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.).[2] 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.).

         The 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. § 171.1012(a)(3)(B)(ii) (Supp.).

         MetTel 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. §§ 112.001, 112.051.

         The 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."

         The 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.

         On 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 the record.

         II. ...

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