The new ruling allows a member of a unitary group that provides services to use cost of goods sold deductions.
The Third Court of Appeals issued its opinion in Combs v. Newpark Resources, Inc. Texas App. Ct, 3rd Dist. No. 03-12-00515-CV (12/31/13). Under Texas Margin Tax provisions, a combined group's cost of goods sold deduction may include COGS expenses only from a member that can independently claim a COGS deduction. As a result, a member of Newpark's unitary group that provides services was not allowed to claim the COGS deduction according to the Comptroller's narrow interpretation. This court ruling dismisses the Comptroller's position and allows service companies that are members of a unitary group in which one member can take the COGS deduction and expands the COGS deduction to all members of the unitary group.
This is an important opinion because it rejects the Texas Comptroller's interpretation of the Texas franchise tax's cost of goods sold deduction (COGS) in favor of the taxpayer's broader interpretation of the statute.
Texas taxpayers that determined certain subsidiaries in a unitary group did not qualify for a COGS deduction in prior tax years should review their COGS computation to determine whether refund claims may be filed consistent with the reasoning in this recent opinion. However, we believe that the Texas Comptroller will likely appeal this decision to the Texas Supreme Court. Any final decision on this matter could take a significant amount of time.
If you would like more information on this case and how it may apply to your business please contact:
Manager, State and Local Tax Services