On December 19, 2018, the 201st District Court of Travis County Texas (the “District Court”) issued a Final Judgment in Xerox Corporation v. Hegar, Docket Number D-1-GN-17-003974, granting refund to the taxpayer and denying the Comptroller’s counterclaim. On its originally filed 2008 and 2009 franchise tax reports, Xerox Corporation (“Xerox”) had used the 0.5% rate to compute its franchise tax under Tex. Tax Code § 171.002(b). The Comptroller, as part of a desk audit, denied the use of the lower rate. Upon appeal to the District Court, the Comptroller also filed a counterclaim asserting the taxpayer overstated its cost of goods sold (COGS) and should have computed taxable margin as 70% of its total revenue.
To qualify for the lower rate, a taxpayer must be primarily engaged in a “wholesale” or “retail” trade, and cannot produce more than 50% of its wholesale or retail trade products. “Wholesale trade” is defined in Tex. Tax Code § 171.0001(18) by reference to Division F of the 1987 Standard Industrial Classification (SIC) Manual. The Comptroller asserted that Xerox’s activities were described by Division D Manufacturing and Division I Services.
Xerox presented evidence regarding its sales-type leases, which were used to sell its equipment. To constitute a sale, the leases had to satisfy criteria regarding the length of the lease in relation to the life of the equipment, and the total of the lease payments in relation to the market value of the equipment. Xerox also presented many other facts regarding its sales and production activities. The Court of Appeals has opined in a substantially similar case, Rent-A-Center v. Hegar, 468 S.W.3d 220 (Tex. App.—2015, no pet.), involving merchandise transferred to its customers through the use of rental agreements. Despite the use of rental agreements, the Court determined that Rent-A-Center was primarily engaged in selling merchandise. The Court disagreed with the Comptroller that the relevant question was whether its sales exceeded its revenues from leases, and determined its activities were more like selling than leasing. Thus, entities using rental/lease agreements may be primarily engaged in a wholesale or retail trade depending on the activities generating the majority of their revenues.
The District Court also denied the Comptroller’s counterclaim that Xerox’s COGS were overstated because the Comptroller was not able to support its claim.
It is unknown whether the Comptroller will appeal the District Court determination in Xerox Corp. v. Hegar. No petition was filed in Rent-A-Center v. Hegar, which was remanded to determine the amounts due to the taxpayer.
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