Sunstate Equip. Co. v. Hegar
| Decision Date | 03 April 2020 |
| Docket Number | No. 17-0444,17-0444 |
| Citation | 601 S.W.3d 685 |
| Parties | SUNSTATE EQUIPMENT CO., LLC, 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 |
Arthur Val Perkins, Foley Gardere/Foley & Lardner LLP, 1000 Louisiana Street, Suite 2000, Houston TX 77002-5018, Stacy R. Obenhaus, Foley Gardere/Foley & Lardner LLP, 2021 McKinney Avenue, Suite 1600, Dallas TX 75201-4761, Zachary T. Jones, Gardere Wynne Sewell LLP, 2021 McKinney Avenue, Suite 1600, Dallas, TX 75201-4761, for Petitioner.
Lisa A. Bennett, Assistant Solicitor General, Kyle D. Hawkins, Office of the Attorney General, Solicitor General, P.O. Box 12548 (MC 059), Charles K. Eldred, Financial & Tax Litigation Division, Office of the Attorney General, P.O. Box 12548 (MC 029), Jeffrey C. Mateer, Texas Attorney General's Office, First Asst. Attorney General, P.O. Box 12548, Capitol Station, W. Kenneth Paxton Jr., Attorney General of Texas, Office of the Attorney General, P.O. Box 12548, Austin, TX 78711-2548, Scott Keller, Baker Botts LLP, 98 San Jacinto Blvd., Suite 1500, Austin, TX 7870, for Respondents.
Autumn Hamit Patterson, Kirk Ronald Lyda, Margaret I. Lyle, Thomas Fenton Allen Jr., Jones Day, 2727 N. Harwood Street, Dallas TX 75201, for Amicus Curiae Herc Rentals Inc.
Daniel L. Butcher, Clark Hill Strasburger, 901 Main St., Ste. 6000, Dallas TX 75202-3794, Farley P. Katz, Forrest M. Seger III, Clark Hill Strasburger, 2301 Broadway St., The Bakery Building, San Antonio TX 78212- 1157, for Amicus Curiae The American Rental Association.
F. Michael Stenglein, King & Spalding LLP, 401 Congress, Suite 3200, Austin TX 78701, Martha Daniels, King & Spalding LLP, 1100 Louisiana St., Ste. 4000, Houston TX 77001, Rebecca Matsumura, King & Spalding, 500 W 2nd St., Ste. 1800, Austin TX 78701-4684, for Amicus Curiae United Rentals, Inc.
This case requires us to determine whether a heavy construction equipment rental company may subtract certain delivery and pick-up costs as cost of goods sold (COGS) under section 171.1012 of the Texas Tax Code. Sunstate Equipment first argues that it is entitled to subtract costs under section 171.1012(k-1), and that its costs fall within those specified by section 171.1012(c) and (d). See TEX. TAX CODE § 171.1012(c), (d), (k-1). Sunstate reasons that the Texas franchise-tax scheme is based on business models and that we should therefore consider its unique business costs when determining its COGS. Alternatively, Sunstate argues that section 171.1012(i) independently authorizes these cost subtractions because they are part of "the costs" associated with "furnishing labor or materials to a project for the construction ... of real property." Id. § 171.1012(i). We disagree and affirm the judgment of the court of appeals.
Sunstate is a Delaware limited liability company with headquarters in Phoenix, Arizona. It rents out heavy construction and industrial equipment to customers throughout Texas. The Texas Comptroller audited Sunstate for the 2008 and 2009 taxable years, assessing deficiencies, penalties, and interest totaling $140,495.88. Sunstate paid the amount under protest and brought suit for a refund.
Each party filed a motion for summary judgment. The district court denied the Comptroller's motion and granted Sunstate's motion, ordering a full refund of the amount paid, including interest. The court of appeals reversed and rendered judgment in favor of the Comptroller. 578 S.W.3d 533, 543 (Tex. App.—Austin 2017, pet. granted) (mem. op.). It concluded that Sunstate's interpretation of subsection (k-1) would invert section 171.1012 to make it about a company's revenue rather than its goods. See id. at 538. Instead, the court of appeals limited subsections 171.1012(c) through (f) to "costs a business incurs to obtain the goods it will sell, whether through production or acquisition" and not "costs it incurs in selling or distributing the goods." Id. (citing TEX. TAX CODE § 171.1012(c) – (f) ). The court of appeals believed this position "is logical and consistent with the apparent purpose of subsection (k-1)—to extend to renters of heavy equipment the same COGS deductions available to a company that sells identical equipment." Id. at 539. The court recognized that holding otherwise would provide companies like Sunstate with a broader class of subtractions than the statute created without a statutory indication that that was the Legislature's intent. See id. The court of appeals agreed with the Comptroller that Sunstate's costs are "more akin to those excluded costs than to any of the allowable costs included in the statute." Id. at 540.
The court of appeals disagreed with Sunstate that subsection (i) provided a separate statutory basis to subtract the costs. Id. Subsection (i) allows an "entity furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance ... of real property" to be considered an owner of that labor and materials and "include the costs, as allowed by ... section [171.1012], in the computation of cost of goods sold." TEX. TAX CODE § 171.1012(i). The court of appeals first reasoned that "Sunstate may not opt to take a COGS deduction under subsection (i), which might arguably apply, rather than subsection (k-1), which definitely and specifically applies." 578 S.W.3d at 541 (citing Lexington Ins. Co. v. Strayhorn , 209 S.W.3d 83, 86 (Tex. 2006) ). Alternatively, it concluded that the equipment Sunstate furnished is not "an essential and direct component of the ‘project for the construction ... of real property.’ " Id. (citations omitted). While Sunstate's customers might be able to benefit from a subsection (i) subtraction, the court of appeals held, Sunstate's labor cannot be "considered a direct component of the improvement projects," nor can its services "be considered an essential component of the projects." Id. at 542 (citations omitted). The court concluded that Sunstate's labor is not provided to the project, but instead helps transport and deliver equipment that its customers might use for a project. See id. at 541–42. According to the court of appeals, it "would stretch subsection (i) too far" to characterize the delivery and pick up of Sunstate's rental equipment as "labor furnish[ed]" within the meaning of subsection (i). Id. at 542 (alterations in original).
Statutory construction is a question of law reviewed de novo. First Am. Title Ins. Co. v. Combs , 258 S.W.3d 627, 631 (Tex. 2008). When determining the meaning of a statute, our purpose is to effectuate the Legislature's intent by "giv[ing] effect to every word, clause, and sentence." Id. (citation omitted). Therefore, to distill the meaning of a statute, we start with its text and the plain meaning of its words construed within the statute as a whole. See Combs v. Roark Amusement & Vending, L.P. , 422 S.W.3d 632, 635 (Tex. 2013) (citation omitted). Unless the statute provides a separate definition, we presume that the Legislature meant to use the ordinary meaning of a word, with each term "interpreted consistently in every part of [the] act." Tex. Dep't of Transp. v. Needham , 82 S.W.3d 314, 318 (Tex. 2002) (citation omitted); see City of Rockwall v. Hughes , 246 S.W.3d 621, 625–26 (Tex. 2008). Only if the text reveals the statute is ambiguous, or applying its plain meaning would produce an absurd result, will we turn to extrinsic sources. See Tex. Health Presbyterian Hosp. of Denton v. D.A. , 569 S.W.3d 126, 135–136 (Tex. 2018) ; Entergy Gulf States, Inc. v. Summers , 282 S.W.3d 433, 437 (Tex. 2009).
The Comptroller asserts that we should strictly construe section 171.1012 against the taxpayer because COGS is a deduction tantamount to an exemption. This Court has previously held that tax exemptions must be construed strictly because "they are the antithesis of equality and uniformity and because they place a greater burden on other taxpaying businesses and individuals." Bullock v. Nat'l Bancshares Corp. , 584 S.W.2d 268, 272 (Tex. 1979) (citation omitted). But Chapter 171 makes clear that the COGS subtraction is not an exemption. The franchise tax is levied on a taxable entity's "taxable margin." TEX. TAX CODE § 171.002. It is not a tax on revenue. The COGS subtraction is part of the calculation of taxable margin, for taxable entities that choose that method. Id. § 171.101(a). Subtracting COGS from total revenue pursuant to section 171.101(a)(1)(B) does not "exempt" or "deduct" otherwise taxable amounts from taxation. Instead, the subtraction is how the amount subject to tax is determined in the first place.
The parties stipulated facts as to activities that occurred between June 1, 2008 and March 31, 2011. As the court of appeals did, we list the stipulated facts below. See 578 S.W.3d at 537.
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