The Texas Comptroller’s Decision in Hearing Nos. 112,139; 112,140; and 112,141 granted the taxpayer’s request to increase the allocated labor costs included in the audit of the taxpayer’s cost of goods sold (COGS). Costs allowed in Tax Code § 171.1012(c) include the direct costs of acquiring or producing goods and additional costs that are allowed in subsection (d) in relation to the entity’s goods. The Decision noted that wholesalers and retailers can include in COGS costs incurred from the point of acquisition of the goods through the point of putting the goods on display for sale. Costs after the point the goods are displayed for sale are considered non-allowed selling costs disallowed by Tax Code § 171.1012(e).
The evidence established how the deli and meat market department personnel must trim/grind the raw meat or slice the blocks of cheese before the goods are available for sale. In addition, the goods have to be weighed and labeled before they can be sold. Similarly, pharmacists must prepare and label prescription medicines before they are available for sale. Therefore, these costs are allowable COGS.
The workforce management labor studies provided by the taxpayer were certainly helpful in establishing the portion of allowable labor costs, but they are not required for a taxpayer to prove up their case, as was affirmed in Comptroller’s Decision Nos. 111,428; 111,429; 111,430; and 111,431. Instead, “the allocation of costs between production and nonproduction should be made on a reasonable basis.” Id.
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