200906480H



SOAH DOCKET NO. 304-08-3737.13
CPA HEARING NO.   48,507

RE: *************
TAXPAYER NO: *************
AUDIT OFFICE: *************
AUDIT PERIOD: January 1, 2003 THROUGH December 31, 2004

Franchise Tax/RFD

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

SUSAN COMBS
Texas Comptroller of Public Accounts

JOHN M. TRESNICKY
Representing Tax Division

*************
Representing Claimant


COMPTROLLER’S DECISION

************* (Claimant) filed a franchise tax refund claim, which was reviewed 
and denied in its entirety by the Texas Comptroller of Public Accounts 
(Comptroller).  Claimant timely requested a refund hearing.  In his proposal 
for decision, the Administrative Law Judge (ALJ) recommends that the refund 
claim be granted.

I.  PROCEDURAL HISTORY, NOTICE & JURISDICTION

On July 7, 2008, Comptroller Staff (Staff) referred this case to the State 
Office of Administrative Hearings for a hearing on written submissions.  There 
are no issues of notice or jurisdiction in this proceeding.  Therefore, these 
matters are set out in the Findings of Fact and Conclusions of Law without 
further discussion here.

Claimant was represented by *************.  Comptroller Staff was represented 
by John M. Tresnicky.  The record closed on July 31, 2008.

II. REASONS FOR DECISION

A. Evidence 

Staff presented the refund denial letter and the claim verification plan.  
Claimant, as attachments to its letter of November 21, 2007, submitted a 
schedule of its customers and a summary of its contacts and interactions with 
the customers.  As attachments to its Reply to Position Letter, Claimant 
submitted its refund claims for 2003 and 2004 and summary schedules for 
determining intrastate and interstate revenue.  The summary schedules are 
supported by source data contained on an Excel disk.

B. Claimant’s Contention

Claimant contends that its franchise tax reports erroneously included receipts 
from transportation of goods in interstate commerce, and that only receipts 
from the transportation of goods picked up and delivered in Texas are Texas 
receipts for apportionment purposes.

C. ALJ’s Analysis

Claimant operates the *************, a company engaged in rail transportation 
in the Northeastern part of Texas.  Claimant’s tracks are located entirely in 
Texas.  In its franchise tax returns for report years 2003 and 2004, Claimant 
apportioned its taxable capital by reporting all of its receipts from rail 
transportation as Texas receipts.  Under Tax Code SECTION 171.106(a), as in 
effect for those report years, a corporation’s taxable capital was apportioned 
to Texas according to the ratio of the corporation’s gross receipts from 
business done in Texas to the gross receipts from the entire business.  Since 
Claimant considered all of its receipts to be Texas receipts, 100 percent of 
its taxable capital was apportioned to Texas in the reports as originally 
filed.  Claimant now contends those reports were in error.  Claimant agrees 
that its receipts for transporting freight received from a Texas point of 
origin to a final destination in Texas are Texas receipts.  However, Claimant 
contends that receipts from transporting freight in interstate commerce should 
not be included in Texas receipts.  For example, Claimant picked up freight 
railcars from customers in Texas and transported them to interchange points, 
all of which were located in Texas.  At the interchange points the railcars 
were transferred from Claimant’s locomotive to the locomotives of other rail 
carriers and transported to final destinations outside the state of Texas.  
Conversely, the other rail carriers brought freight railcars from outside Texas 
to the interchange points, where the railcars were transferred to Claimant’s 
locomotives for transportation to final destinations in Texas.  Claimant 
contends its receipts from transporting freight as part of an interstate 
journey are not Texas receipts.

During the report years in question, Tax Code SECTION 171.1032(a)(2) provided 
that gross receipts from business done in Texas included receipts from each 
service performed in the state.  Since transportation of freight is a service, 
and the transportation was performed by means of railcars, tracks, and 
personnel located within Texas, the statute would appear not to support 
Claimant’s position.  However, the franchise tax rule regarding taxable capital 
apportionment contains a specific provision regarding transportation companies. 
 34 Tex. Admin. Code SECTION 3.549(b)(45) states:

Transportation companies must report Texas receipts from transportation 
services by:

(A) including receipts derived from the transportation of goods or passengers 
in intrastate commerce; or

(B) multiplying total transportation receipts by total mileage in transporting 
goods and passengers picked up and delivered within Texas (in intrastate 
commerce) divided by total mileage everywhere.

The rule provides two alternative methods; one method based on receipts derived 
from intrastate transportation, and a second based on the ratio of intrastate 
miles to total mileage everywhere.  Claimant’s franchise tax reports use the 
first method based on receipts.  Claimant proposes to treat as Texas receipts 
those receipts from transporting freight from Texas points of origin to Texas 
destinations.  Claimant proposes to exclude from Texas receipts the receipts 
from transporting freight in Texas when the transportation is a segment of an 
interstate journey on the grounds that such transportation is not intrastate 
commerce as specified in the Administrative rule.  Claimant submitted detailed 
data regarding its freight receipts, and Staff does not challenge the 
sufficiency of the information. 

Staff takes the position, however, that all of Claimant’s receipts were from 
intrastate commerce because Claimant’s tracks are located in Texas and the 
transportation occurs within Texas.  Staff states that Claimant’s contractual 
relationships are with the other interstate rail carriers and not with the 
customers themselves.  Claimant disputed this and submitted a summary schedule 
of its direct customer interactions regarding logistics, rates, and shipment 
volume.  Claimant does not deny that its payments are received from the 
interstate rail carriers.  Staff does not explain the significance of whether 
Claimant interacts only with the carriers or also with the ultimate customers, 
and that distinction is not found significant. 

Because the Comptroller has promulgated a specific rule provision for 
apportioning transportation company receipts, this case depends upon the 
meaning of “intrastate commerce” as that term is used in the rule.  
Administrative rules are construed in the same manner as statutes to give 
effect to the intent of the agency.  Lewis v. Jacksonville Building & Loan 
Association, 540 S.W.2d 307 (Tex. 1976).  Based on the meaning given to the 
term “intrastate commerce” in previous Comptroller rulings, the ALJ concludes 
that intrastate commerce for tax apportionment for transportation companies 
means only business begun and completed in Texas, and that it does not include 
intrastate segments of transportation in interstate commerce.  Staff’s position 
is rejected as contrary to the intent of 34 Tex. Admin. Code SECTION 
3.549(b)(45).

Because this conclusion is in large part based on how the term intrastate 
commerce was historically understood and applied, the prior precedents will be 
discussed.  In the early case of Clark v. Atlantic Pipe Line Co., 134 S.W.2d 
322 (Tex. Civ. App. 1939, writ ref’d), the taxpayer was an oil pipeline company 
that shipped oil from Texas points of origin to terminals on the Texas Gulf 
Coast, where the taxpayer loaded the product onto ships for transport to other 
states and to foreign ports.  The shipments, although occurring entirely in 
Texas, were shipments in interstate commerce, and the taxpayer’s receipts from 
the shipments were not receipts from business done in Texas.  This was so even 
though the transactions were completed under local bills of lading and there 
was some storage at the terminal wharves.  The Texas franchise tax at that time 
was imposed on taxable capital apportioned to Texas based on the percentage of 
gross receipts from business done in Texas to gross receipts from the entire 
business of the corporation.  Although the phrase “business done in Texas,” 
considered in the abstract, was found broad enough to include the segregated 
portion of interstate business which was wholly performed in Texas, the court 
concluded that such construction would result in taxation of interstate 
commerce prohibited by the Commerce Clause of the United States Constitution as 
that clause was then understood.  Therefore, the court construed “business done 
in Texas” as meaning only intrastate business, stating: “We hold that the 
language, ‘business done in Texas,’ as employed in this statute was intended to 
mean business begun and completed in Texas, and not business begun in Texas and 
completed in some other state or foreign nation, or vice versa.  In other 
words, that it means intrastate business.”

Consistent with Atlantic Pipe Line Co., the Comptroller has interpreted the 
term “intrastate commerce” as meaning business begun and completed in Texas.  
In Comptroller’s Decision No. 6,851 (1980), Staff agreed that the taxpayer’s 
receipts from the intrastate portions of interstate journeys were not receipts 
from business done in Texas.  In Comptroller’s Decision No. 10,486 (1980), a 
taxpayer received receipts from transporting property on its seventeen-mile 
track located entirely within Texas.  Staff, citing Atlantic Pipe Line Co., 
agreed that the taxpayer’s receipts from transporting property which originated 
from an out-of-state location or which was destined for an out-of-state 
location were not receipts from intrastate commerce and should not be 
considered Texas receipts; only transportation which begins and ends in Texas 
would result in receipts from business done in Texas.  State Tax Automated 
Research Document No. 9510L139D04 (October 27, 1995) states: “Transportation 
receipts from interstate commerce (even the Texas portion) will not be 
apportioned to Texas.  Transportation receipts from intrastate commerce (Texas 
pick up and Texas delivery) are apportioned to Texas.”  Comptroller’s Decision 
No. 35,677 (2001), dealing with apportionment of revenue from access charges 
for interstate telephone calls, cited the prior Comptroller’s decisions 
regarding transportation companies for the principle that “the provider of only 
an intrastate portion of the interstate journey is not required to source its 
revenues to Texas.” 

Comptroller’s Decision No. 8,888 (1978) reached a different result, based on 
the administrative rule in effect at that time.  The taxpayer hauled freight 
along fixed routes entirely located in Texas and transferred the freight at 
terminals in Texas to other carriers engaged in interstate commerce.  Former 
Franchise Tax Ruling .013(2)(m), stated: 

A transportation company may use total mileage traveled inside the borders of 
Texas and the total mileage traveled everywhere in determining percentage of 
business done in Texas.  If the Company uses intrastate receipts in its 
franchise tax reports and its books and records do not accurately reflect the 
amount of Texas receipts reported, the Comptroller may utilize the mileage 
basis in projecting and establishing the amount of business done in Texas by 
the corporation. 

The use of the mileage ratio method, which resulted in 100 percent Texas 
receipts since all of the taxpayer’s mileage was Texas, was upheld.  The 
Comptroller agreed that the taxpayer’s receipts were from shipments in 
interstate commerce under Atlantic Pipe Line Co., but noted that the tax 
statute had since been amended to state that business done in Texas includes 
receipts from “services performed within Texas.”  The Comptroller further 
concluded that the Commerce Clause interpretation that was the basis for the 
decision in Atlantic Pipe Line Co. was overruled in cases such as Complete Auto 
Transit v. Brady, 430 U.S. 274 (1977).  However, the ruling in Decision No. 
8,888 ultimately depended upon the administrative rule then in effect, which 
provided that the percentage of Texas business could be determined by the 
“total mileage” traveled inside the borders of Texas compared to the total 
mileage traveled everywhere.  The Comptroller determined that total mileage 
traveled inside Texas was not the equivalent of intrastate travel in the 
constitutional sense.  For that reason, the miles that the taxpayer traveled 
along routes in Texas, even when engaged in interstate commerce, were part of 
the total miles in Texas.  That result would be precluded by the current rule, 
34 Tex. Admin. Code SECTION 3.549(b)(45), which uses the term “intrastate 
commerce” with regard to both the receipts and mileage.  Even though the result 
was different in Decision No. 8,888, the term intrastate commerce was 
understood to mean transportation with a Texas point of origin and a Texas 
delivery.

Given the consistent meaning given to the term intrastate commerce in the 
precedents regarding franchise tax apportionment for transportation companies, 
the ALJ concludes that receipts from intrastate commerce under 34 Tex. Admin. 
Code SECTION 3.549(b)(45) means receipts for transporting goods from a Texas 
point of origin to a delivery point that is also in Texas, and that receipts 
for transporting goods in a segment of interstate commerce are not intrastate 
commerce, even when the transportation occurs in Texas.  Unless a rule is 
ambiguous, the clear language of the rule should be followed, and if an agency 
does not follow its own rules, its actions are considered arbitrary and 
capricious.  Myers v. State, 169 S.W.3d 731 (Tex. App. –Austin 2005, no pet.).  
Claimant’s contention should be granted pursuant to the meaning and intent of 
administrative rule promulgated by the Comptroller.  This recommendation is 
based on the rule and not on constitutional considerations.  As discussed in 
Comptroller’s Decision No. 8,888, the constitutional limits on state taxation 
of interstate commerce have changed in recent decades.  Under Tex. Tax Code 
Ann. SECTION 101.002(b), effective August 28, 1989, the jurisdiction and 
authority of the state to determine the subjects and objects of taxation 
extends to the limits of current interpretations of the Texas and United States 
Constitution and laws.  This refund claim, however, must be disposed of 
according to the rule as it existed during the relevant periods.  Since 
Claimant’s amended reports are supported by a preponderance of the evidence as 
required by 34 Tex. Admin. Code SECTION 1.40(2)(B), the refund claim should be 
granted.

III. FINDINGS OF FACT

1. *************. (Claimant) filed a franchise tax refund claim for report 
years 2003 and 2004. 

2. The claim was denied by the Texas Comptroller of Public Accounts 
(Comptroller).  Claimant timely requested a refund hearing.

3. The case was referred to the State Office of Administrative Hearings for 
written submission hearing.  The record closed on July 31, 2008.

4. Comptroller Staff issued a Notice of Filing to Claimant that contained a 
statement of the nature of the hearing; a statement of the legal authority and 
jurisdiction under which the hearing was to be held; a reference to the 
particular SECTION of statute and rules involved; and a short, plain statement 
of the matters asserted.

5. Claimant received receipts for transporting freight by railcar from a Texas 
point of origin to a final destination in Texas.  In its amended reports for 
2003 and 2004, Claimant classified these receipts as Texas receipts. 

6. Claimant received receipts for transporting freight by railcar in Texas as 
part of interstate commerce; the freight originated from an out-of-state point 
of origin or was transported by other carriers to an out-of-state destination.  
In its amended reports for 2003 and 2004, Claimant classified these receipts as 
non-Texas receipts.

7. Claimant’s amended franchise tax reports were supported by summary schedules 
and source data.

IV. CONCLUSIONS OF LAW

1. The Comptroller has jurisdiction over this matter pursuant to Tex. Tax Code 
Ann. ch. 111.

2. The State Office of Administrative Hearings has jurisdiction over matters 
related to the hearing in this matter, including the authority to issue a 
proposal for decision with findings of fact and conclusions of law pursuant to 
Tex. Gov’t Code Ann. ch. 2003.

3. The Comptroller provided proper and timely notice of the hearing pursuant to 
Tex. Gov’t Code Ann. ch. 2001.

4. The Comptroller has consistently interpreted the term “intrastate commerce” 
for franchise tax apportionment for transportation companies as meaning 
business begun and completed in Texas; receipts from the intrastate portions of 
interstate journeys have not been considered receipts from business done in 
Texas.

5. Claimant’s franchise tax reports as amended are consistent with 34 Tex. 
Admin. Code Ann. SECTION 3.549(b)(45).

6. Based on the foregoing Findings of Fact and Conclusions of Law, the refund 
claim should be granted.


Hearing No. 48,507

ORDER OF THE COMPTROLLER

On August 1, 2008, the State Office of Administrative Hearings’ (SOAH) 
Administrative Law Judge, Alvin Stoll, issued a Proposal for Decision in the 
above referenced matter.  The parties were given fifteen days from the date of 
the Decision to file exceptions with SOAH.  No exceptions were filed, and the 
Comptroller has determined that the Administrative Law Judge’s Proposal for 
Decision should be adopted as written.

The above decision resulting in a credit to Taxpayer as set out in “Attachment 
A,” which is incorporated by reference, is approved and adopted in all 
respects.  This decision becomes final twenty days after the date Claimant 
receives notice of this decision.  If either party desires a rehearing, that 
party must file a Motion for Rehearing, which must state the grounds for 
rehearing, no later than twenty days after the date Claimant receives notice of 
this decision.  Notice of this decision is presumed to occur on the third day 
after the date of this decision.

Signed on this 15th day of June 2009.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller




ACCESSION NUMBER: 200906480H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 06/15/2009
TAX TYPE: FRANCHISE