Texas Comptroller of Public Accounts    STAR System


201102012H



STAR SUPERSEDED INFORMATION
Accession No. - 201102012H
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Document superseded on - 08/01/2012 
Issue(s) that caused the document to be superseded - Election date for Cost of 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. 304-11-1254.13
CPA HEARING NO. 104,076

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: Franchise Tax **************
AUDIT PERIOD: January 1, 2009 THROUGH December 31, 2009

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


COMPTROLLERíS DECISION

************** (Claimant) filed a tax refund claim based on an Amended Texas 
Franchise Tax Report (Amended Report). The Texas Comptroller of Public Accounts 
(Comptroller) rejected the Amended Report and denied the refund claim. Claimant 
requested a refund hearing contending its Amended Report should be accepted, 
because it was filed to correct a mistake. Claimant also contends the report 
form is flawed, because it does not allow taxpayers to affirmatively make a 
required taxable margin election. Comptroller Staff (Staff) concedes that the 
cost of goods sold amount reflected in Claimantís original report was 
mistakenly understated, but contends the Amended Report must be rejected, 
because it was filed after the report due date and changes the taxable margin 
calculation from 70% of total revenue to the cost of goods sold method. In his 
Proposal for Decision, the Administrative Law Judge (ALJ) finds Claimantís 
Amended Report was properly rejected, and therefore recommends the refund 
denial be affirmed, because Claimant failed to demonstrate tax was paid 
erroneously. 

I. PROCEDURAL HISTORY, NOTICE & JURISDICTION

On November 15, 2010, Staff referred the above-referenced matter to the State 
Office of Administrative Hearings (SOAH) and issued a Notice of Hearing that 
contained a statement of the date, time, and place of the hearing, 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, as required by the Administrative Procedure Act. SEE TEX. GOVíT. CODE 
ANN. Section 2001.052. The Comptroller has jurisdiction over this matter 
pursuant to TEX. TAX CODE ANN.ch. 111, and SOAH has jurisdiction over the 
hearing, including the authority to issue a proposal for decision, pursuant to 
TEX. GOVíT. CODE ANN. ch. 2003.

On January 20, 2011, ALJ Victor John Simonds convened a hearing on the merits. 
Claimant was present and represented by ************** of **************. Staff 
was also present and was represented by Assistant General Counsel James 
Arbogast. The ALJ closed the contested case record at the conclusion of the 
hearing. 

II. CONTESTED CASE

A. Evidence Submitted

Claimant submitted the following exhibits:

1. Claimantís 2009 Report;
2. Claimantís 2008 Report;
3. Claimantís 2009 Texas Franchise Tax Payment & Receipt;
4. Affidavit of INDIVIDUAL A;
5. Affidavit of INDIVIDUAL B, with attached exhibits;
6. Claimantís 2009 Amended Report;
7. Comptroller Notice of Disallowed Amended Report;
8. Texas Notice of Tax/Fee Due;
9. Comptroller Waiver of Penalty on 2009 Report;
10. Claimantís Federal Income Tax Return, Form 1120, 2008; and
11. COMPANY A Federal Income Tax Return, Form 1120S, 2008.

Each of Claimantís exhibits was admitted without objection. Staff did not 
submit any evidence, because the documents it was prepared to offer were 
admitted as part of Claimantís submission.

B. Staff Agreed Adjustments

Staff did not agree to any adjustments.

C. Summary of Stipulated and Undisputed Facts

Claimant, located in **************, Texas, is a hardscape construction 
contractor that provides paving surfaces, masonry and stucco surfaces, fences, 
walls, water features, and similar surfaces and structures to landscapers and 
builders. ************** (COMPANY A) is an affiliate. INDIVIDUAL A is the sole 
owner of both businesses.

In its 2008 Report, Claimant calculated its taxable margin by subtracting its 
$************** cost of goods sold from total revenue. In 2009, for the first 
time, Claimant filed a combined report that included COMPANY A. The 2009 Report 
included a cost of goods sold value, but the total amount reported was only 
$**************, because Claimant inadvertently reported only COMPANY Aís cost 
of goods sold. It left off the $************** cost of goods sold amount 
pertaining to its own operations. Thus, 100% of the reported cost of goods sold 
related to COMPANY Aís operations, even though the affiliate accounted for only 
a small percentage of the combined groupís revenue. The consequence of the 
reporting error was that Claimantís taxable margin was lower when it was 
calculated based on 70% of total revenue than it was when calculated based on 
cost of goods sold. Therefore, Claimant used the 70% of total revenue value to 
calculate that it owed $************** in franchise tax.

Mr. INDIVIDUAL A stated he first noticed the 2009 cost of goods sold reporting 
error on February 3, 2010; i.e. after the November 15, 2009, extended due date 
for the report. Claimantís accountant prepared the Amended Report to include 
Claimantís cost of goods sold, and found that after correcting the error its 
taxable margin was lower when calculated based on the cost of goods sold 
deduction. The Amended Report tax liability was $**************. The Amended 
Report was rejected by the Comptroller. The related $************** franchise 
tax refund claim was denied as well. Claimant requested a refund hearing.

D. ALJís Analysis & Recommendation

The taxable margin of a taxable entity is determined by calculating the lesser 
of 70% of total revenue from the entityís total business, or by subtracting, at 
the election of the taxpayer, either the cost of goods sold or compensation 
from total revenue. SEE TEX. TAX CODE ANN. Section 171.101(a)(1), 171.1011, 
171.1012, and 171.1013. If a taxable entity elects to use the cost of goods 
sold or compensation deduction, then the election is made on the taxable 
entityís annual franchise tax report and can be made no later than the report 
due date. SEE TEX. TAX CODE ANN. Section 171.101(d). 

Claimant contends the report form is flawed, because it does not allow the 
taxpayer to affirmatively make the election. And it is true that the 2009 
Report does not include an election check-box or something similar, but that 
fact does not support Claimantís contention, because the Comptrollerís rules 
provide that taxpayers make the election by filing the report using one method 
or the other. SEE TEX. TAX CODE ANN. Section 171.101(d). Stated differently, 
the taxpayer makes (or does not make) its election to determine taxable margin 
using cost of goods sold or compensation when it calculates the tax due. Tax 
Code Section 171.101(a) states that taxable margin is the lesser of 70% of 
total revenue, or an amount calculated by using either the cost of goods sold 
or compensation deduction. But the statutory language should not be interpreted 
as a mandate that a taxpayer must use a particular methodology for calculating 
its taxable margin. Such an interpretation would render the taxpayerís ability 
to elect the calculation methodology it wishes to use meaningless. It is 
presumed the Legislature did not intend to do a useless act. See LIBERTY MUT. 
INS. CO. V. GARRISON CONTRACTORS, INC., 966 S.W.2d 482, 485 (Tex. 1998). 
Therefore, the ALJ finds that the directive to use the lowest calculated value 
should be construed as guidance based on the recognition that taxpayers 
generally do not pay more tax than the law requires. Claimant used the 70% of 
revenue baseline when it calculated its taxable margin in the original 2009 
Report. More specifically, it did not elect to calculate taxable margin using 
the cost of goods sold deduction.

The Comptrollerís rules provide that a taxable entity can 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 the method of 
computing margin to 70% of total revenue or, if qualified, the E-Z computation. 
SEE 34 TEX. ADMIN. CODE Section 3.584(f)(1). Thus, for example, a taxpayer 
would be permitted to file an amended report to correct a cost of goods sold 
reporting error, if the taxpayer timely elected to use the cost of goods sold 
deduction in its report but subsequently discovered the reported cost of goods 
sold value was erroneous. Such a taxpayer would be entitled to amend its report 
to correct the error, and if the correction indicated tax had been paid in 
error, then the amended report could be used to support a refund claim. 
Unfortunately, that is not what happened in the instant matter. Claimantís 
original report calculated taxable margin based on 70% of total revenue, but it 
elected to use the cost of goods sold deduction in its Amended Report. When it 
filed the Amended Report, Claimant sought to change its taxable margin 
calculation methodology from 70% of total revenue to the cost of goods sold 
after the 2009 Report due date. A taxable entity may not amend its report to 
change its taxable margin calculation from 70% of total revenue to the cost of 
goods sold or compensation deduction after the report due date. SEE 34 TEX. 
ADMIN. CODE Section 3.584(f)(1). The clear intent of Tax Code Section 
171.101(d) and TEX. ADMIN. CODE Section 3.584(f)(1) is to prohibit that type of 
franchise tax report amendment. SEE COMPTROLLERíS DECISION NO. 103,083 (2010), 
which cites related legislative history. The ALJ therefore finds that 
Claimantís Amended Report was properly rejected, and the refund denial should 
be affirmed.

III. FINDINGS OF FACT

1. ************** (Claimant) located in **************, Texas, is a hardscape 
construction contractor that provides paving surfaces, masonry and stucco 
surfaces, fences, walls, water features, and similar surfaces and structures to 
landscapers and builders.

2. Claimant and ************** (COMPANY A) are affiliates and each is 100% 
owned by INDIVIDUAL A.

3. Claimantís 2008 Texas Franchise Tax Report (Report) related only to Claimant 
and listed a cost of goods sold incurred during the 2007 calendar year of 
$**************.

4. Claimant timely filed for an extension of the due date for filing the 2009 
Report.

5. The extended due date for Claimantís 2009 Report was November 16, 2009.

6. Claimantís combined 2009 Report was based on 2008 calendar year operations 
and was the first to include COMPANY A.

7. Claimantís 2009 Report was prepared and signed by its accountant, INDIVIDUAL 
B. The report showed revenue for the combined group of $**************. Only 
$************** pertained to COMPANY A.

8. Mr. INDIVIDUAL A and Mr. INDIVIDUAL B state Claimant always intended to 
include the largest permissible cost of goods sold with its 2009 Report.

9. The 2009 Report showed $************** as a cost of goods sold. The entire 
amount pertained to COMPANY A. The worksheet area for Claimantís cost of goods 
sold was left blank.

10. A cost of goods sold amount of $************** pertaining to Claimantís 
operations during calendar year 2008 was unintentionally left off the original 
2009 Report. The error led Claimant to calculate taxable margin based on 70% of 
total revenue.

11. Mr. INDIVIDUAL A stated he first noticed there was no costs of goods sold 
reported for Claimant on February 3, 2010.

12. Upon learning of the error, Mr. INDIVIDUAL B prepared and submitted an 
amended report for 2009 (Amended Report) to include Claimantís cost of goods 
sold.

13. The Amended Report was submitted after the 2009 Report due date, and 
calculated taxable margin based on the cost of goods sold deduction.

14. The Amended Report showed a franchise tax liability of $**************, 
which was $************** less than the tax amount due per the original return.

15. Claimant filed a claim for refund of $************** (plus applicable 
credit interest).

16. The Texas Comptroller of Public Accounts (Comptroller) rejected the Amended 
Report and denied the related refund request.

17. Claimant requested a refund hearing.

18. On November 10, 2010, Comptroller Staff (Staff) referred the matter to the 
State Office of Administrative Hearings.

19. Staff provided a Notice of Hearing by Written Submission 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. GOVíT CODE ANN. Ch. 2003.

3. The Comptroller provided proper and timely notice of the hearing pursuant to 
TEX. GOVíT CODE ANN. ch. 2001 and TEX. TAX CODE ANN Section 111.009.

4. The taxable margin of a taxable entity is determined by calculating 70% of 
total revenue from the entityís total business, or by subtracting, at the 
election of the taxpayer, either the cost of goods sold or compensation. SEE 
TEX. TAX CODE ANN Section 171.101(a)(1), 171.1011, 171.1012, and 171.1013. 

5. If a taxable entity elects to use the cost of goods sold or compensation 
deduction, then the election is made on the taxable entityís annual franchise 
tax report and can be made no later than the report due date. The methodology 
election is made by filing the report using one deduction or the other. SEE 
TEX. TAX CODE Section 171.101(d).

6. 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% of total revenue 
or, if qualified, the E-Z computation. SEE 34 TEX. ADMIN. CODE Section 
3.584(f)(1). 

7. A taxable entity may not amend its Report to change its taxable margin 
calculation from 70% of total revenue to the cost of goods sold or compensation 
deduction after the report due date. SEE 34 TEX. ADMIN. CODE Section 
3.584(f)(1). 

8. The clear intent of Tax Code Section 171.101(d) and TEX. ADMIN. CODE Section 
3.584(f)(1) is to prohibit franchise tax report amendments, filed after the 
annual report due date, that change the margin tax computation from the 70% 
baseline method to the cost of goods sold or compensation deduction method. SEE 
COMPTROLLERíS DECISION NO. 103,083 (2010), which cites legislative history. 

9. Based on the foregoing Findings of Fact and Conclusions of Law, Staffís 
rejection of Claimantís 2009 Amended Report was proper, and the refund denial 
should be affirmed.


Hearing No. 104,076

ORDER OF THE COMPTROLLER

On January 28, 2011, the State Office of Administrative Hearingsí (SOAH) 
Administrative Law Judge (ALJ), Victor John Simonds, 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 ALJís 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 23rd day of February 2011.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller




ACCESSION NUMBER: 201102012H
SUPERSEDED: S
DOCUMENT TYPE: H
DATE: 02/23/2011
TAX TYPE: FRANCHISE