Texas Comptroller of Public Accounts    STAR System


201007874H



STAR SUPERSEDED INFORMATION
Accession No. - 201007874H
Supersede type - complete
Document superseded on -  08/01/2012 
Issue(s) that caused the document to be superseded - Election date for Cost of Goods
Sold or Compensation Deduction
Reason(s):  Subsequent policy reversal; See STAR 201206444L for current policy. 


SOAH DOCKET NO. 304-10-3742.13
CPA HEARING NO.   103,083

RE: *************
TAXPAYER NO.: *************
AUDIT OFFICE: *************
AUDIT PERIOD: January 1, 2008 THROUGH December 31, 2008

Franchise Tax/RFD

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

SUSAN COMBS
Texas Comptroller of Public Accounts

JAMES D. ARBOGAST
Representing Tax Division

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


COMPTROLLER’S DECISION

*************. (Claimant) filed an amended Texas Franchise Tax Report for 
report year 2008 in which it recalculated its taxable margin using the Cost of 
Goods Sold (COGS) Deduction rather than the 70 percent of revenue limitation 
used to file its original 2008 franchise tax report.  Claimant claimed a refund 
of $*************.  The claim was denied by the Texas Comptroller of Public 
Accounts (Comptroller) based on 34 TEX. ADMIN. CODE Section 3.584, which 
Comptroller Staff (Staff) explained precludes a taxable entity, after the due 
date of the report, from amending its report to change its election to COGS or 
compensation.

Claimant timely requested a refund hearing.  On April 16, 2010, the case was 
referred to the State Office of Administrative Hearings (SOAH).  On May 6, 
2010, Staff moved for summary disposition on the grounds that there was no 
genuine issue as to any material fact and that the Comptroller was entitled to 
a decision in its favor as a matter of law.  Claimant has not filed a response 
opposing the motion for summary disposition.  Having considered the motion, the 
Administrative Law Judge (ALJ) found that Staff’s Motion for Summary 
Disposition should be granted and that the case should be decided based on the 
evidence submitted.  On June 11, 2010, the ALJ issued an order granting the 
motion for summary disposition, canceling the scheduled oral hearing, 
announcing his intent to issue a Proposal for Decision (PFD) disposing of the 
case by summary disposition, and closing the record on June 11, 2010.  In his 
PFD, the ALJ recommends that the denial of the refund claim should be affirmed.

I.  PROCEDURAL HISTORY, NOTICE, AND JURISDICTION

Comptroller Staff was represented by Assistant General Counsel James D. 
Arbogast.  Claimant was represented by its certified public accountant, 
*************.  A record closing date of June 11, 2010, was set by ALJ Peter 
Brooks.

There are no contested issues of notice or jurisdiction, and therefore those 
matters are set out in the Findings of Fact and Conclusions of Law without 
further discussion here.

II. REASONS FOR DECISION

A. Summary Disposition Standard

Upon presentation of sufficient proof that there is no genuine issue as to any 
material fact and that a party is entitled to a decision in its favor as a 
matter of law, a case may be disposed of in whole or in part by summary 
disposition.  1 TEX. ADMIN. CODE Section 155.505.  The proof that can be used 
to support a summary disposition includes pleadings, affidavits, materials 
obtained by discovery, matters officially noticed, stipulations, authenticated 
or certified public or business records, and other admissible evidence.

B. Issue Presented

The issue presented is whether Claimant could amend its original Franchise Tax 
Report by changing the method it used to calculate margin.  Under the revised 
Texas Franchise Tax Act, franchise tax is calculated based on a taxable 
entity’s taxable margin.  Taxable margin is computed by first determining a 
taxable entity’s margin, which is the lesser of (1) 70 percent of the taxable 
entity’s total revenue from its entire business, or (2) the amount computed by 
subtracting from the taxable entity’s total revenue from its entire business, 
at the taxable entity’s election, its total COGS or total compensation 
[ENDNOTE: (1)].  The Claimant originally did not elect to use either the COGS 
or compensation method of computing its margin, but rather took 70 percent of 
its total revenue as its margin.  Claimant subsequently filed an amended return 
using the COGS method of computing its margin which, if accepted by the 
Comptroller, would produce a refund.  Staff denied the refund claim arguing 
that Claimant was required to make the election by the due date of its original 
report, and no later than the due date of its annual report [ENDNOTE: (2)].

C. Evidence Presented and Undisputed Material Facts

Staff submitted the following exhibits as attachments to its Motion for Summary 
Disposition: (1) Claimant’s original 2008 Texas Franchise Tax Report, including 
the Affiliate Schedule and Ownership Information Report, (2) Claimant’s amended 
2008 Texas Franchise Tax Report, including the payment form and Affiliate 
Schedule, (3) the Comptroller’s letter denying the refund claim, (4) Claimant’s 
request for a refund hearing, (5) Staff’s Position Letter, (6) Claimant’s 
Response to Staff’s Position Letter, and (7) a copy of TEX. TAX CODE ANN. 
Section 171.101.  Claimant had submitted as part of its Statement of Grounds 
copies of the amended and original 2008 Texas Franchise Tax Reports.

The following undisputed facts are taken from the pleadings of the parties and 
the evidence submitted:

1.  Claimant is a landscape, architecture, construction, and management company 
in CITY, Texas.

2.  Claimant’s original Texas Franchise Tax Report (original report) for the 
2008 report year stated total revenue of $*************.

3.  Taxable entities calculate their margin on their Franchise Tax Report by 
using all three methods: the 70 percent revenue limitation, the Cost of Goods 
Sold deduction, and the Total Compensation deduction.

4.  In computing margin for report year 2008 under the 70 percent revenue 
limitation, Claimant’s Total Revenue of $************* was multiplied by 70 
percent resulting in $************* in margin.  Margin was also calculated by 
subtracting the Total COGS deduction ($*************) from Total Revenue 
($*************), resulting in $************* in margin.  Margin was also 
calculated by subtracting Total Compensation ($*************) from Total 
Revenue ($*************), resulting in $************* in margin.  These results 
were all reported on the original report.

5.  Claimant chose to use the 70 percent of revenue calculation of margin 
because it was lower than the COGS and Compensation calculation methods.  
Claimant reported taxable margin of $************* on its original report, 
because 100 percent of its receipts were apportioned to Texas.

6.  By computing taxable margin using the 70 percent of revenue limitation, 
Claimant did not make an election of the COGS method or the Compensation method 
of calculating taxable margin on its original report.

7.  The one percent tax rate was applied to the taxable margin of 
$*************, resulting in tax due of $*************, which Claimant remitted 
to the Comptroller.

8.  On May 14, 2009, Claimant submitted an Amended Texas Franchise Tax Report 
(amended report) and requested a refund in the amount of $*************.

9.  Claimant on its original report disclosed a Total COGS calculation of 
$*************, but on its amended report disclosed a Total COGS calculation of 
$*************.  Claimant’s calculation of Total Compensation remained the same 
on both the original and amended reports.

10.  Claimant elected to compute taxable margin on the amended report using the 
Total COGS deduction because it exceeded the Total Compensation deduction and 
the 30 percent reduction in total revenue resulting from use of the 70 percent 
limitation.  Claimant reported tax due of $************* on its amended report, 
which is $************* less than the franchise tax reported on its original 
report.

11.  The Comptroller’s Revenue Accounting Division issued a letter dated July 
22, 2009, denying Claimant’s $************* refund claim, citing 34 TEX. ADMIN. 
CODE Section 3.584(d)(1).

12.  Claimant timely requested a refund hearing contesting the denial on the 
grounds that the original report was prepared using the best information 
available, but that a later review of Claimant’s business and a redesign of the 
accounting system produced an accurate COGS calculation.

13.  The Tax Division prepared a Position Letter dated September 15, 2009, 
setting forth the Tax Division’s position that the amended report and refund 
request were properly denied under Rule 3.584.

14.  Claimant submitted a Response to Tax Division’s Position Letter Regarding 
2008 Amended Return citing the novelty of the Texas margin tax and the lack of 
clear information on the Comptroller’s website at the time the original report 
was filed as the reason there was no election of the COGS method in the 
original report.

15.  The case was referred to SOAH for an oral hearing on April 16, 2010.

D. Analysis and Recommendation

Resolution of this case turns on a construction of Tax Code Section 171.101(a) 
and (d) that control a taxable entity’s election of the Total COGS deduction or 
Total Compensation deduction in computing its margin.  Tax Code Section 
171.101(a) provides that, as an alternative to the 70 percent of revenue margin 
calculation, margin may be calculated by subtracting from total revenue, “at 
the election of the taxable entity, either: (a) cost of goods sold, as 
determined under Section 171.1012; or (b) compensation, as determined under 
Section 171.1013.”  Section 171.101(d) provides that the election must be made 
by the due date of the report:

An election under Subsection (a)(1)(B)(ii) shall be made by the taxable entity 
on its annual report and is effective only for that annual report.  A taxable 
entity shall notify the comptroller of its election not later than the due date 
of the annual report.

The Comptroller adopted Rule 3.584(f)(1), which provides more detailed 
instructions for taxable entities to follow in making the annual election.  The 
rule explicitly prohibits a taxable entity from amending its report to change 
to a COGS deduction or Compensation deduction after the due date of its 
original report:

A taxable entity may file an amended report for the purpose of correcting a 
mathematical or other error in a report, for the purpose of supporting a claim 
for refund, or to change its method of computing margin to 70 percent of total 
revenue or, if qualified, the E-Z Computation.  After the due date of the 
report, an amended report may not be filed to change the method of computing 
margin to a cost of goods sold deduction or to a compensation deduction 
(emphasis added).

This prohibition is repeated in Rule 3.584(d)(1):

(1) Annual Election.  If eligible, a taxable entity must make an annual 
election to deduct cost of goods sold or compensation by the due date or at the 
time the report is filed, whichever is later.  The election is made by filing 
the franchise tax report using one method or the other.  (See Section 3.588 of 
this title (relating to Margin: Cost of Goods Sold) and Section 3.589 of this 
title (relating to Margin: Compensation) for eligibility.).  If an election is 
not made, the taxable entity’s margin will be calculated as 70 percent of total 
revenue.  After the due date of the report, a taxable entity may not amend its 
report to change its election to cost of goods sold or compensation.  However, 
a taxable entity may amend its report to change its method of computing margin 
from cost of goods sold or compensation to 70 percent of total revenue or, if 
eligible, the E-Z Computation (emphasis added).

It should be noted that the Comptroller distinguishes between its treatment of 
the election to use the COGS and Compensation deductions and the calculation of 
margin based on 70 percent of total revenue.  The 70 percent of total revenue 
method of computing margin is not described as an election, but rather operates 
as a baseline or default for calculating margin.  This treatment is made even 
more evident in subsection 3.584(d)(1), which provides that, if an election is 
not made between the COGS deduction and the Compensation deduction, the taxable 
entity’s margin will be calculated as 70 percent of total revenue.  Therefore 
it is not inconsistent for the Comptroller to allow a taxpayer to amend its 
report to change from using the COGS or Compensation deduction to the 70 
percent of revenue method, yet prohibit a reverse switch.

Staff’s position that Claimant is barred from amending its report to use the 
COGS deduction is also supported by the legislative history of Tax Code Section 
171.101(d).  Section 171.101(d) as originally adopted by the legislature in its 
revision of the Texas Franchise Tax Act read that the election to use the COGS 
deduction or Compensation deduction under Section 171.101(a)(1)(B)(ii) “may be 
changed by filing an amended report.”  During the 2007 session, the legislature 
in HB 3928 deleted this language and substituted the current language requiring 
that the election be made not later than the due date of the annual report.  
The Senate Committee Report for House Bill 3928 adds further support to Staff’s 
denial of Claimant’s amended report:

SECTION 12.  Amends Section 171.101(d), Tax Code, as effective January 1, 2008, 
to require a taxable entity to notify the comptroller of public accounts 
(comptroller) of its election, as provided by Subsection (a)(1)(B)(ii) 
(regarding a taxable entity electing to subtract certain items from its taxable 
margin) not later than the due date of the annual report.  Deletes existing 
text authorizing the election to be changed by filing an amended report 
[ENDNOTE: (3)] (emphasis supplied).

The same intent is evident in the House Committee Report (Substituted) on HB 
3928:

The bill amends Section 171.101(d), Tax Code, as effective January 1, 2008, to 
require a taxable entity to notify the comptroller of its election of deduction 
not later than the due date of the annual report, and to prohibit a change of 
the election by filing an amended report. [ENDNOTE: (4)]

The legislative history of Tax Code Section 171.101(d) leaves no doubt that the 
intent of the legislature was to prohibit amendments which would change the 
election to compute margin from the 70 percent baseline method to the COGS or 
Compensation deduction after the due date of the annual report.  The ALJ finds 
that the denial of the amended return and attendant refund claim should be 
affirmed.

III. FINDINGS OF FACT

1.  *************. (Claimant) is a landscape, architecture, construction, and 
management company in CITY, Texas.

2.  On May 14, 2009, Claimant submitted an Amended Texas Franchise Tax Report 
(amended report) for report year 2008 and requested a refund in the amount of 
$*************.  Claimant had changed its method of calculating taxable margin 
from the 70 percent of revenue method to the Cost of Goods Sold method.

3.  The Comptroller’s Revenue Accounting Division issued a letter dated July 
22, 2009, denying Claimant’s $************* refund claim, citing 34 TEX. ADMIN. 
CODE Section 3.584(d)(1).

4.  Claimant timely requested a refund hearing contesting the denial.

5.  The case was referred to the State Office of Administrative Hearings for an 
oral hearing on April 16, 2010.

6.  Comptroller Staff provided a notice of hearing to Claimant.  The notice 
contained the date, the time, and 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 sections of the statutes and rules 
involved; and a short, plain statement of the matters asserted.

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 ch. 2001 and TEX. TAX CODE ANN Section 111.009.

4.  Tax Code Section 171.101(d) provides that the election to use the Cost of 
Goods Sold deduction or Compensation deduction under Tax Code Section 
171.101(a)(1)(B)(ii) must be made by the taxable entity on its annual report 
and not later than the due date of the annual report.

5.  After the due date of the report, an amended report may not be filed to 
change the method of computing margin to a cost of goods sold deduction or to a 
compensation deduction.  34 TEX. ADMIN. CODE Section 3.584(f)(1).

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

Hearing No. 103,083

ORDER OF THE COMPTROLLER

On June 15, 2010, the State Office of Administrative Hearings’ (SOAH) 
Administrative Law Judge, Peter Brooks, 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, except for minor changes to correct typographical or clerical errors, 
should be adopted as written.

The above Decision 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 28th day of July 2010.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller

ENDNOTE(S)
(1) TEX. TAX CODE ANN. Section 171.101(a)(1).
(2) TEX. TAX CODE ANN. Section 171.101(d).
(3) Texas Legislature Online, HB 3928, 80th Legislature, Senate Committee Report
(Substituted), www.legis.state.tex.us/tlodocs/80R/analysis/doc/HBO39285.doc. 
(4) Id.




ACCESSION NUMBER: 201007874H
SUPERSEDED: S
DOCUMENT TYPE: H
DATE: 07/28/2010
TAX TYPE: FRANCHISE