Lockheed Martin Corp. v. Hegar

• Decision Date: 01 May 2020
• Docket Number: No. 18-0566,18-0566
• Citation: 601 S.W.3d 769
• Parties: LOCKHEED MARTIN CORPORATION, Petitioner, v. Glenn HEGAR, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas, Respondents
• Court: Texas Supreme Court

601 S.W.3d 769

LOCKHEED MARTIN CORPORATION, Petitioner,

v.Glenn HEGAR, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas, Respondents

No. 18-0566

Supreme Court of Texas.

Argued January 30, 2020

Opinion delivered: May 1, 2020

Evan A. Young, Benjamin A. Geslison, Ellen E. Springer, Baker Botts L.L.P., Doug Sigel, Mark W. Eidman, Ryan Law Firm, PLLC, Austin, Rebeca Aizpuru Huddle, Baker Botts L.L.P., Houston, David Arms Heywood, Lockheed Martin Corp, Bethesda, MD, Jeremy Gove, Reed Smith LLP, New York NY, for Petitioner.

Ari Cuenin, Office of the Solicitor General, Kyle D. Hawkins, Office of the Attorney General, Solicitor General, Jeffrey C. Mateer, Texas Attorney General's Office, First Asst. Attorney General, Joshua T. Wilson, W. Kenneth Paxton Jr., Attorney General of Texas, Office of the Attorney General, Austin, for Respondents.

Curtis James Osterloh, Scott Douglass & McConnico, LLP., Austin, for Amicus Curiae Council on State Taxation.

Justice Lehrmann delivered the opinion of the Court, in which Chief Justice Hecht, Justice Green, Justice Guzman, Justice Devine, Justice Blacklock, Justice Busby, and Justice Bland joined.

This case involves a franchise-tax dispute, but federal law regulating foreign military sales plays a significant role in the resolution of that dispute. Lockheed Martin Corporation manufactured F-16 fighter jets in Fort Worth destined for foreign-government buyers. As required by federal law, the foreign buyers contracted with the U.S. government to purchase the jets, and the U.S. government in turn contracted with Lockheed Martin. The overarching issue is whether Lockheed Martin's receipts from the sales of those jets were properly sourced to Texas for purposes of calculating its Texas franchise tax. The trial court and the court of appeals held that they were. We disagree and reverse the court of appeals' judgment.

I. Background

Because the transactions giving rise to this tax dispute were structured to comply with federal arms-control laws, we begin with a discussion of that framework.

A. Regulation of Foreign Military Sales

To support U.S. foreign-policy and national-security objectives, the Arms Export Control Act restricts sales of U.S.-manufactured military goods to foreign governments. See 22 U.S.C. §§ 2751 – 2799aa-2. The level of restriction depends on the sensitivity of the "defense articles" being purchased. See id. § 2778. Approved foreign governments may purchase certain less-sensitive defense articles directly from private contractors with relatively minimal direct government oversight via what are known as "Direct Commercial Sales" transactions. See id. ; U.S. DEP'T OF DEF., DEF. SEC. COOPERATION AGENCY , DoD 5105.38-M, SECURITY ASSISTANCE MANAGEMENT MANUAL §§ C4.3.6 (2003) [hereinafter "2003 SAMM"].¹ Defense articles of greater military sensitivity, including the F-16 fighter jets that are the subject of this suit, are subject to substantially more government oversight and control and may be purchased only through the "Foreign Military Sales" (FMS) program, which is administered by the Department of Defense. See 22 U.S.C. §§ 2761 – 62 ; see also 2003 SAMM §§ C4.1, C4.3.²

FMS transactions begin with a "Letter of Request" from a foreign government identifying the defense articles or services the government wishes to purchase. 2003 SAMM § C5.1.1. The foreign government and the U.S. government then enter into a formal "Letter of Offer and Acceptance" (LOA) that itemizes the defense articles or services the foreign government intends to procure and the terms and conditions of the sale. See id. §§ C4.1.1, C5.4.1. LOAs may be "implemented" in one of two ways. First, under certain circumstances the Department of Defense may fulfill the order from its existing stocks. 22 U.S.C. § 2761. Second, the U.S. government may "enter into contracts for the procurement of defense articles" from private contractors. Id. § 2762; see also 2003 SAMM § C4.3.1 (explaining that the Department may enter into procurement contracts "on behalf of eligible foreign countries"). The second "procurement" pathway is at issue here.

Under that pathway, a signed LOA identifies the foreign buyer, sets out the precise design specifications requested, and includes plans for delivery to the buyer. See 2003 SAMM fig.C5.F2. The price of the items is set at "the total cost" to the U.S. government of procuring the items, regardless of whether that cost exceeds the LOA's estimate.³ Id. fig.C5.F3; see 22 U.S.C. § 2762 (providing that in an FMS sale to a foreign government, the foreign government must provide the U.S. government "with a dependable undertaking (1) to pay the full amount of such contract which will assure the United States Government against any loss on the contract, and (2) to make funds available in such amounts and at such times as may be required to meet the payments required by the contract, and any damages and costs that may accrue from the cancellation of such contract"). Once an LOA is finalized and the foreign buyer remits the initial payment or assurance of payment, the U.S. government is responsible for procuring the items "under terms and conditions consistent with [Department] regulations and procedures." 2003 SAMM figs.C5.F2–.F3. The U.S. government then contracts with a private contractor to produce the items specified in the LOA.⁴ BAE Sys. Tech. Solution & Servs., Inc. v. Republic of Korea's Def. Acquisition Program Admin. , 884 F.3d 463, 467 (4th Cir. 2018). The LOA allows the United States to terminate or take other action with respect to those contracts without affecting the LOA.⁵

The U.S. Court of Appeals for the Fourth Circuit describes the FMS program as "requir[ing] the intermediation of the United States and a back-to-back contract structure." Secretary of State for Def. v. Trimble Navigation Ltd. , 484 F.3d 700, 707 (4th Cir. 2007). The structure "reflects the national security interests of the United States" and forecloses implying a direct contractual relationship between the domestic contractor and the foreign purchaser. See id. ; see also BAE Sys. Tech. , 884 F.3d at 467 ("The U.S. government ‘determines the contract type, selects the contract source, and negotiates prices and contract terms with individual contractors.’ " (quoting DEF. INST. OF SEC. COOPERATION STUDIES, THE MANAGEMENT OF SECURITY COOPERATION ( GREEN BOOK ) 15-8 (37.1 ed. 2017))).⁶ Thus, a procurement purchaser claiming defective items, rather than complaining directly to the contractor, is directed to submit a "supply discrepancy report" to the U.S. government, which "may be able to resolve the problem by seeking resolution through the contractor under the provisions of the ... procurement contract." Trimble Navigation , 484 F.3d at 704 (quoting 37.1 GREEN BOOK 8-11).

B. The FMS Transactions at Issue

The facts of this case are largely stipulated. Lockheed Martin Corporation is a global security and aerospace company engaged in the research, design, development, manufacture, integration, and sustainment of advanced technological systems, products, and services. Lockheed Martin operates a manufacturing facility in Fort Worth, where it produces military aircraft for both the U.S. government and certain approved foreign governments. During the franchise-tax report years 2005 to 2007, Lockheed Martin delivered a number of F-16 fighter jets that it had developed and produced at that facility for the governments of Chile, Greece, Israel, Oman, and Poland. As required by the Arms Export Control Act, the sales of the F-16s were handled through the FMS program described above. Thus, each sale was effected through two contracts: one between Lockheed Martin and the U.S. government, and one (the LOA) between the U.S. government and the foreign buyer.

The contracts between Lockheed Martin and the U.S. government identified the respective foreign buyers and called for the jets to be designed to the buyers' specifications, including integrating certain equipment furnished by the foreign buyers. A Ferry Plan associated with each transaction "define[d] events, tasks, and personnel associated with the delivery of [the] aircraft from Lockheed Martin ... to [the foreign buyer]." Transfer of legal title to each of the F-16s occurred at Lockheed Martin's Fort Worth facility upon the execution of a Material Inspection and Receiving Report (DD250) by an authorized U.S. government representative. The executed DD250 signified the U.S. government's "final acceptance of the aircraft ... as meeting the applicable contractual requirements." Lockheed Martin was then authorized to request payment, which was made by the U.S. government "out of funds the foreign buyer ha[d] on deposit ... or based upon a ‘dependable undertaking’ by that foreign government."

In the next step of the transaction, the U.S. government representative signed a Requisition and Invoice/Shipping Document (DD Form 1149) documenting transfer of possession and control of the aircraft to the U.S. government.⁷ Another form, the Aerospace Vehicle Delivery Receipt (AFTO 290), documented the transfer of possession and control of the aircraft to a U.S. government pilot responsible for transporting it to the purchasing foreign government. A representative of that government countersigned the AFTO 290 upon final delivery of the aircraft. Pursuant to the Ferry Plan, Lockheed Martin retained certain obligations throughout the delivery process, such as providing "technical assistance" at intermediate locations and additional "on-site assistance and liaison support" at such locations as "necessary to allow uninterrupted delivery."

C. Procedural History

The current dispute began when Lockheed Martin filed a claim with the Comptroller for a refund of the portion of its franchise taxes for the tax years 2005 through 2007 attributable to the sales of the F-16 aircraft described above. Lockheed Martin claimed that the receipts from its sales...