The main issue in the case, Titan Transportation LP v. Combs, et al, was whether or not the company could exclude from gross receipts the payments made to subcontractors for hauling, delivering and depositing aggregate used in the construction of real property when calculating its Texas franchise tax.
The Comptroller disallowed Titan's exclusion of subcontractor payments when determining its gross receipts. Titan subsequently appealed the Comptroller's ruling since the exclusion of subcontractor payments significantly increased its Texas franchise tax by approximately 900 percent. The Third Court of Appeals disagreed with the Comptroller's narrow interpretation of the Texas franchise tax revenue exclusion statute and the lower court opinion. The Court rejected all of the Comptroller's arguments and further stated that subcontractor payments could be excluded from gross receipts whenever there was some credible nexus or a connection with services performed on real estate construction projects.
Why This Case is Important to Our Clients
This is an important opinion because it rejects the Comptroller's long-held narrow interpretation of the Texas franchise tax revenue exclusion statute in favor of Titan's broader interpretation of the statute and its application. As a result, companies in the aggregate, concrete cement, and similar industry sectors connected to real property construction projects should carefully review the findings in this case. Additionally, with this case, the Court opened the door to other industries that also make payments to subcontractors to similarly exclude these payments from their gross receipts calculation.
HB 500, which passed during the last Texas legislative session, specifically addressed this issue for aggregate transportation companies on a prospective basis. However, we believe this case has a much broader application to other Texas businesses. Companies should consider whether or not they have overpaid their Texas franchise tax in previous tax periods, as they could be entitled to significant refunds.
More About the Case
The Comptroller argued that Titan was a transportation company, not a construction company. In addition, the Comptroller noted that Titan did not have a written contract with its customers stating that a portion of its income would be paid to subcontractors, and that payments to Titan were not separately stated to specifically identify how much each subcontractor would be paid.
Note that HB 500 codified that taxpayers primarily engaged in the business of transporting aggregates are allowed an exclusion from gross receipts payments made to subcontractors beginning January 1, 2014.
If you would like more information on this case and how it may apply to your business, contact Mike Goral, partner-in-charge of state and local tax services, or Michael Regan, state and local tax manager.
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