Texas Comptroller of Public Accounts    STAR System


201008923H



STAR SUPERSEDED INFORMATION
Accession No. - 201008923H
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Document superseded on - 08/01/2012 
Issue(s) that caused the document to be superseded - Election date for Cost of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. 304-10-4202.13
CPA HEARING NO. 103,450

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 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 E-Z Computation rate method, which 
it had used to file its original 2008 franchise tax report. Claimant requested 
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) contends precludes a taxable entity from changing its 
election to use the COGS deduction after the due date of the report. In his 
Proposal for Decision, the Administrative Law Judge (ALJ) recommends that the 
denial be affirmed.

I. PROCEDURAL HISTORY, NOTICE, AND JURISDICTION

Staff referred the case to the State Office of Administrative Hearings (SOAH) 
on May 13, 2010, for a written submission hearing. There are no contested 
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.

Staff was represented by Assistant General Counsel James D. Arbogast. Claimant 
was represented by its CPA, *************. A record closing date of July 19, 
2010, was set by ALJ Peter Brooks.

II. REASONS FOR DECISION

A. Background and Issue Presented

Under the revised Texas Franchise Tax Act, the 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 cost of goods 
sold (COGS) or total compensation. [ENDNOTE: (1)] Taxable entities with total 
revenue of not more than $10 million may choose an alternative means, the E-Z 
Computation, to calculate their franchise tax liability. Under the E-Z 
Computation, an eligible taxable entity apportions its total revenue to the 
state of Texas and applies a special rate of 0.0575 percent to the apportioned 
amount. [ENDNOTE: (2)] The standard rate applicable to all other taxable 
entities is “one per cent of taxable margin,” except for those taxable entities 
that are primarily engaged in retail or wholesale trades, which are subject to 
a rate of “0.5 percent of taxable margin.” [ENDNOTE: (3)] The issue presented 
in this case is whether Claimant could amend its original 2008 Franchise Tax 
Report by changing the method it used to calculate margin from the E-Z 
Computation method to the GOGS deduction.

Claimant was engaged in the residential construction business during the 2008 
report period, but has subsequently ceased business operations. Claimant 
originally did not elect to use either the COGS or compensation method of 
computing its margin, but rather used the EZ Computation method of computing 
its franchise tax liability. [ENDNOTE: (4)] 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 to use the COGS method 
by the due date of its original report, and no later than the due date of its 
annual report. [ENDNOTE: (5)]

Claimant argues that it had used an Oklahoma based accountant to prepare and 
file its original 2008 franchise tax return. The accountant was not familiar 
with the newly revised franchise tax act and used the E-Z Computation method 
even though selection of the COGS deduction would have resulted in a lower tax 
liability. Claimant asserts that many taxpayers were also confused about their 
compliance obligations under the revised franchise tax act, and requests that 
it be allowed to correct the error and claim the COGS deduction to which it was 
entitled. [ENDNOTE: (6)]

B. Evidence Presented

Staff submitted the administrative record consisting of the pleadings filed 
while this case was pending before the Comptroller. Claimant attached to its 
pleadings copies of its amended 2008 franchise tax report, its 2008 federal 
income tax return, and the Comptroller’s letter denying the refund claim. 
These items have been admitted into the record.

C. 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 report’s due date:

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 supplied)

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 supplied)

The E-Z Computation method authorized under Tax Code Section 171.1016 is 
distinguishable from the COGS and compensation deductions. There is no 
requirement in the statute or rule that the taxable entity must notify the 
Comptroller by any particular date of its election to use the E-Z Computation 
method. If a taxable entity has total revenue of not more than $10 million it 
may simply file its franchise tax report using the E-Z Computation method.

Staff’s position that Claimant is barred from amending its report to use the 
COGS deduction is 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 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: (7)]

(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: (8)]

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 E-Z Computation 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) was engaged in the residential construction 
business during the 2008 report period.

2. On June 12, 2009, Claimant submitted an Amended Texas Franchise Tax Report 
(amended report) for report 2008 and requested a refund in the amount of 
$*************. Claimant had changed its method of calculating taxable margin 
from the E-Z Computation method to the Cost of Goods Sold (COGS) method.

3. The Comptroller of Public Accounts (Comptroller) issued a letter dated July 
2, 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 SOAH for a written submission on May 13, 2010.

6. Comptroller Staff provided a notice of filing to Claimant. The notice 
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 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 COGS 
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 not later than the due 
date of the annual report.

5. After the due date of the annual 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. 103,450

ORDER OF THE COMPTROLLER

On July 21, 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 18th day of August 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 171.1016(b)(3).

(3) TEX. TAX CODE ANN. Section 171.002(a) and (b).

(4) A copy of Claimant’s original 2008 franchise tax report was not submitted. 
Although the date the original report was filed was not disclosed by either 
party, there is no dispute that the report was timely filed. 

(5) TEX. TAX CODE ANN. Section 171.101(d).

(6) Claimant also requested the waiver of any penalties imposed. No penalties 
were imposed.

(7) Texas Legislature Online, HB 3928, 80th Legislature, Senate Committee 
Report (Substituted), www.legis.state.tex. 
us/tlodocs/80R/analysis/doc/HBO39285.doc. 

(8) Id.




ACCESSION NUMBER: 201008923H
SUPERSEDED: S
DOCUMENT TYPE: H
DATE: 08/18/2010
TAX TYPE: FRANCHISE