Shocking Court Cases In Texas: Franchise Tax, Sales & Use Tax, Miscellaneous Gross Receipts Tax, Beverage Tax

Shocking Court Cases In Texas: Franchise Tax, Sales & Use Tax, Miscellaneous Gross Receipts Tax, Beverage Tax

Court Cases

Franchise Tax


Conagra Brands, Inc. v. Hegar, No. 03-21-00111-CV (Tex. App.—Austin Aug 24, 2022, no pet. h.)—The Third Court of Appeals held that a taxpayer could not include gross receipts from certain securities in its apportionment-factor denominator for purposes of calculating its Texas franchise tax.[1]

  • The taxpayer in question was in the business of producing food products for sale to grocery stores, convenience stores and food service businesses. In order to mitigate the risks associated with potential fluctuations in the price of necessary components and raw materials, the taxpayer bought and sold commodity futures contracts.
  • The taxpayer argued that these securities were inventory for federal tax purposes and that the gross proceeds from the sale of these securities should be included in its apportionment factor denominator. On appeal, however, the taxpayer didn’t dispute the trial court’s finding that the securities weren’t inventory as defined in the Internal Revenue Code. Instead, the taxpayer argued that the securities were in substance inventory under the U.S. Supreme Court’s decision in Corn Products Refining Co. v. Comm’r, 350 U.S. 46 (1955).

  • In Corn Products, the Supreme Court held that corn futures purchased by a manufacturer of products made from corn in order for the manufacturer to obtain an adequate supply of corn without having to expand its storage facilities weren’t capital assets.
  • The Third Court of Appeals determined that the Supreme Court didn’t say that such futures were actually inventory but merely that they were so integral to the manufacturer’s inventory-purchase system that they fell within the inventory exclusion from the definition of a capital asset in I.R.C. § 1221(a). The Third Court of Appeals also noted that Congress had subsequently amended the Internal Revenue Code to create a specific exclusion from the definition of a capital asset for certain hedging transactions, which further showed that hedging transactions weren’t inventory.

Sales Tax

Assignments of Refund

Piazza v. Hegar, No. 03-19-00246-CV (Tex. App.—Austin August 30, 2022, no pet. h.)—In the latest of a series of cases and administrative decisions stretching back over a decade, the Third Court of Appeals held that customers couldn’t obtain refunds of sales tax that they had paid to Best Buy. During the periods in question, Best Buy had a rebate program where Best Buy would partially refund the retail price of certain goods but not the sales tax that the customers had paid on the full retail price. Best Buy had remitted these taxes to the Comptroller. Certain customers brought a tax refund suit against the Comptroller. The Comptroller filed a plea to the jurisdiction, which the District Court granted. The Court of Appeals agreed with the Comptroller that the assignment of right to refund that the customers received from Best Buy in 2017 was invalid because this right had already been assigned in 2008 (even though the Court later determined that this 2008 assignment, which assigned the right to refund to a class rather than specific individual taxpayers, was insufficient to prosecute a refund claim).[2]

Notable Additions to the State Tax Automated Research (“STAR”) System

Miscellaneous Gross Receipts Tax

Guidance on HB 1520

STAR Accession No. 202207013L (July 22, 2022)—In this private letter ruling, the Comptroller ruled the following:

  • A natural gas distribution provider’s revenues associated with the issuance of certain customer rate relief bonds aren’t included in gross receipts for purposes of the miscellaneous gross receipts tax. As background, HB 1520, 87th Leg., R.S. (2021) directed the Railroad Commission of Texas and the Texas Public Finance Authority to work together to issue customer rate relief bonds, the proceeds of which were to be used by a gas utility to pay for the extraordinary costs of natural gas during Winter Storm Uri. These bonds were meant to provide rate relief to customers by extending the time a gas utility may recover the extraordinary costs. The bill also created a tax exemption related to revenues associated with those bonds.
  • A provider may collect sales tax from its customers on only the taxable portion of the monthly gas cost recovery rate and only taxable portion is included in gross receipts for purposes of the miscellaneous gross receipts tax. The gas recovery rate is a single line-item that gas utility companies have been directed to use to invoice the collection of customer rate relief charges. In an audit, such companies must provide sufficient documentation of the non-taxable portion of the gas cost recovery rate or the whole rate may be subject to sales tax and included in gross receipts for the purposes of the gross receipts tax.
  • The exclusion from miscellaneous gross receipts tax for certain sales to public school districts found in Tax Code § 182.022(d) (Imposition and Rate of Tax), effective January 1, 2024, applies only to sales of electricity, not sales of natural gas.

International Fuels Tax Agreement

Books and Records

Comptroller’s Decision No. 117,328 (2022)—The administrative law judge found that when a taxpayer that owned approximately 16 trucks and was a licensee under the International Fuels Tax Agreement (“ITFA”) failed to maintain required trip sheets or monthly summaries, didn’t keep fuel receipts, and reported miles traveled that were inconsistent with those recorded in its own books, the Comptroller didn’t have to rely on these records and could make an assessment of the motor fuels taxes due based on the best information available.

Mixed Beverage Taxes

Depletion Analysis

Comptroller’s Decision Nos. 116,118 and 116,119 (2022)—The administrative law judge found that statements made by a taxpayer operating a bar regarding the size of an average pour wasn’t the best evidence to determine the average pour for mixed beverage tax purposes when the auditor used an upward-adjusted average of four unannounced pours tests.[3] The ALJ also ruled that the taxpayer’s monthly sales summaries were insufficient proof that it was entitled to an additional allowance for complimentary drinks. The ALJ further rejected the taxpayer’s arguments that it was entitled to penalty waiver (the taxpayer had 10 late returns, and thus didn’t show reasonable diligence to comply with the tax laws during the audit period) or interest waiver.[4]

Comptroller’s Decision Nos. 117,275 and 117,276 (2022)—The administrative law judge determined that a taxpayer that operated a bar failed to provide evidence showing that the auditor’s average pour for distilled spirits was inaccurate because it did not account for multi-pour specialty drinks or that the prices for distilled spirits and beer were overstated.

Comptroller’s Decision Nos. 117,220 and 117,221 (2022)—The administrative law judge determined that a taxpayer that operated a bar had not shown that the average price for beer used in the auditor’s depletion analysis was inaccurate. The ALJ also found that the imposition of the 50% fraud penalty against the taxpayer wasn’t in error when the taxpayer had an error rate of 60% and had purchased almost $100,000 in beer inventory that wasn’t reported to the Comptroller.[5]

Sales and Use Tax


Comptroller’s Decision No. 115,436 (2022)—The administrative law judge found that an export packer failed to prove by clear and convincing evidence that its purchases of packaging supplies used to ship products to customers were exempt as tangible personal property exported from the United States.[6] Specifically, the administrative law judge determined that the taxpayer’s bills of lading did not identify the buyer, seller, consignor, consignee, or delivery location, and there was no documentation that identified which packaging supplies were used by taxpayer in warehousing and intrastate shipping services.

Have a question? Contact TL Fahring, JD.



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