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Stephen Long

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Texas—never known for doing anything on a small-scale—is starting off 2017 with what is likely to be billions of dollars worth of good news for the Comptroller. On January 6, the Third District Court of Appeals released a substituted opinion in American Multi-Cinema Inc. v. Hegar, No. 03-14-00397-CV, a case dealing with the scope of the Texas franchise tax costs of goods sold (“COGS”) deduction.  The Comptroller’s office predicted that the court’s original decision, issued…

Bright-line, factor presence nexus has become an increasingly popular issue in state taxation in recent years. While the rules and thresholds vary from state-to-state, the Multistate Tax Commission’s (“MTC”) model rule exemplifies how factor presence nexus works.  Specifically, the MTC’s model rule provides, in part, that “substantial nexus” (i.e., a taxable presence) exists for corporate income tax purposes if an out-of-state taxpayer has total sales in the state exceeding $500,000 during any given taxable period.  Several states–including Alabama, California, Colorado, New York, Ohio, and Tennessee–have adopted factor presence nexus rules; however, to date, there have been very few cases that have considered the constitutionality of bright-line, factor presence nexus standards.  

The Texas Supreme Court recently granted a petition for review in ETC Marketing, Ltd v. Harris County Appraisal District, 467 S.W.3d 501 (Tex. App.—Houston [1st Dist.] 2015, pet. granted). The question before the high court in ETC Marketing, Ltd is whether an operator of an intrastate natural gas pipeline in Texas is required to pay ad valorem taxes on the value of 33 billion cubic feet of gas stored in a Harris County reservoir. The stakes are high as the 33 billion cubic feet of gas could give rise to a $162 million ad valorem tax bill.

The Texas Comptroller has traditionally taken a broad view of what constitutes a taxable “data processing service.” However, one recent Texas Court of Appeals decision rebuked this interpretation with a ruling that presents wide-ranging implications in Texas. This decision, Hegar v. CheckFree Services Corp., No. 14-15-00027-CV (Tex. App.—Houston [14th Dist.], Apr. 19, 2016, no pet. h.), narrows the breadth of what constitutes taxable “data processing services” for Texas sales tax purposes.