Tgs-Nopec Geophysical Co. v. Combs

• Decision Date: 15 August 2008
• Docket Number: No. 03-07-00640-CV.,03-07-00640-CV.
• Citation: 268 S.W.3d 637
• Parties: TGS-NOPEC GEOPHYSICAL COMPANY, Appellant, Susan Combs, Successor-in-Interest to Carole Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas, Cross-Appellants, v. Susan COMBS, Successor-in-Interest to Carole Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas, Appellees, TGS-NOPEC Geophysical Company, Cross-Appellee.
• Court: Texas Court of Appeals

268 S.W.3d 637

TGS-NOPEC GEOPHYSICAL COMPANY, Appellant Susan Combs, Successor-in-Interest to Carole Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas, Cross-Appellants, v. Susan COMBS, Successor-in-Interest to Carole Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas, Appellees TGS-NOPEC Geophysical Company, Cross-Appellee.

No. 03-07-00640-CV.

Court of Appeals of Texas, Austin.

August 15, 2008.

Rehearing Overruled November 3, 2008.

James Thomas McBride, Manuel Lopez, Kristi Belt, Shook, Hardy & Bacon, L.L.P., Houston, TX, for Appellant.

Christine Monzingo, Assistant Attorney General, Taxation Division, Austin, TX, for Appellee.

Before Justices PATTERSON, PURYEAR and HENSON.

OPINION

JAN P. PATTERSON, Justice.

This appeal arises from a franchise tax dispute involving the apportionment of gross receipts from the licensing of geophysical and seismic data. The parties filed cross-motions for summary judgment, and the trial court granted summary judgment in favor of the Comptroller¹ on the issue of tax liability but, finding that the Comptroller abused her discretion in denying appellant TGS-NOPEC Geophysical Company's requests to waive penalties and interest, the trial court granted summary judgment to TGS on that issue. TGS appeals the trial court's summary judgment of tax liability, and the Comptroller cross-appeals from the trial court's summary judgment reversing the imposition of penalties and interest. Because we find no error, we affirm the trial court's judgment.

BACKGROUND

TGS licenses geophysical and seismic data to its customers throughout the United States and abroad. This data is used by oil and gas companies to explore for and develop oil and gas deposits and can be licensed to more than one customer. TGS charges each customer a flat fee for a non-exclusive license to use the data.² The data is typically provided to customers on magnetic tape. Once the data is delivered to the customer, the customer uses the data at its discretion with limited restrictions on transferability and who can view the data.

The State of Texas imposes franchise taxes on each business, or taxable entity, that does business in this state. See Tex. Tax Code Ann. § 171.001 (West 2008). Franchise taxes are imposed annually based on business done in Texas during the previous accounting year. Id. § 171.1532 (West 2008). Subject to various exceptions and exemptions, the franchise tax rate for most businesses is one percent of that business's taxable margin.³ Id. § 171.002 (West 2008). Section 171.101 of the tax code describes the calculation used to determine taxable margin. Id. § 171.101 (West 2008). To determine the amount of franchise tax owed, a business's taxable margin must be apportioned between business done in Texas and business done elsewhere. Id. § 171.106 (West 2008). This calculation is done by multiplying a business's taxable margin by a fraction, the numerator of which is the business's gross receipts from business done in Texas, and the denominator of which is the business's gross receipts from all of its business. Id. §§ 171.103 (determining gross receipts for business done in Texas); .105 (determining gross receipts for entire business); .106(a) (apportioning taxable margin) (West 2008).

This appeal concerns a dispute about the numerator, or TGS's gross receipts for business done in Texas. The tax code currently requires TGS to pay franchise taxes based on its gross receipts for its licensing activities in Texas. See id. §§ 171.002, .103(a)(4). Prior to 1997, the tax code did not specify how to apportion gross receipts from licensing activities for franchise tax purposes. See Act of Aug 13, 1991, 72nd Leg., 1st C.S., ch. 5, § 8.06, 1991 Tex. Gen. Laws 134, 156 (codified as amended at Tex. Tax Code Ann. § 171.103(4)); Act of May 27, 1993, 73rd Leg., R.S., ch. 546, § 3, 1993 Tex. Gen. Laws 2043, 2043 (codified as amended at Tex. Tax Code Ann. § 171.1032(a)(4)). TGS therefore relied on opinions and letter rulings issued by the Comptroller to apportion its gross receipts and calculate the amount of franchise taxes owed. Prior to 1997, for franchise tax purposes, the Comptroller treated the licensing of geophysical and seismic data as "sales of an intangible" and apportioned gross receipts from licensing activities based on the location of the payor. See Tex. Comptroller of Pub. Accounts, STAR Document Nos. 9103L1087B07 (issued Mar. 8, 1991), available at http://aixtcp.cpa.state.tx.us/opendocs/open07/1087b07l.html; 9005L1019F09 (issued May 23, 1990), available at http://aixtcp.cpa.state.tx.us/opendocs/open07/1019f09l.html; 8209T0476C03 (issued Sept. 10, 1982), available at http://aixtcp.cpa.state.tx.us/opendocs/open28/0476c03t.html.⁴ Finding that patents, copyrights, trademarks, licenses and franchises were "types of similar intangible assets," the legislature amended the tax code, effective January 1, 1998, to tax trademarks, franchises, and licenses in the same manner as patents and copyrights. See Act of May 30, 1997, 75th Leg., R.S., ch. 1185, §§ 5-6, 1997 Tex. Gen. Laws, 4569, 4569-70 (effective Jan. 1, 1998) (originally codified at Tex. Tax Code Ann. §§ 171.103(4), .1032(a)(4)).⁵ The fiscal note estimate prepared by the Comptroller for the 1997 amendments provided in relevant part:

Current franchise tax law sources the receipts from trademarks, franchises, and licenses used in Texas to the state of legal domicile of the corporation remitting the payments. [Receipts from p]atents and copyrights are [apportioned] to Texas if the patent or copyright [is] used in Texas. This bill would equalize treatment among these types of similar intangible assets: The receipts would be [apportioned] to Texas if the assets were used in Texas.... The changes related to sourcing receipts from certain intangible assets would provide a small revenue gain.

Comptroller of Pub. Accounts, Fiscal Note Estimate, Tex. S.B. 861, 75th Leg., R.S. (1997) (emphasis added). As a result of the 1997 amendments, taxpayers like TGS were required to apportion gross receipts from licensing activities based on the location of use instead of the location of the payor. See Tex. Tax Code Ann. § 171.103(4).

The Comptroller audited TGS and assessed additional franchise taxes, penalties, and interest of approximately $1.8 million for the 1997-2000 and 2001-2003 audit periods. These assessments arose from TGS's failure to correctly apportion its gross receipts as required under the 1997 amendments to sections 171.103 and 171.1032 of the tax code. On December 6, 2004, the Comptroller issued an amended notice of audit results for the 1997-2000 audit period finding that TGS owed additional franchise taxes in the amount of $232,437.46, plus interest of $78,489.33. The Comptroller issued a notice of audit results for the 2001-2003 audit period on December 7, 2004, finding that TGS owed additional franchise taxes in the amount of $1,162,310.65, plus penalties of $116,231.07 and interest of $139,021.20.

After evaluating the factors listed in Comptroller administrative rule 3.5, the Comptroller waived the penalty for the first audit period but denied waiver of the penalty for the second audit period. See 34 Tex. Admin. Code § 3.5 (2008). The Comptroller also denied TGS's request to waive interest for both audit periods. TGS paid the additional taxes, penalties, and interest under protest and filed suit to recover a refund as permitted under section 112.052 of the tax code. See Tex. Tax Code Ann. § 112.052 (West 2008).

TGS and the Comptroller filed cross-motions for summary judgment. The trial court granted summary judgment in favor of the Comptroller on the tax liability issue and concluded that TGS's tax liability for the two audit periods in question was $1,394,748.11. The trial court denied the Comptroller's motion for summary judgment on the issue of penalties and interest and granted summary judgment in favor of TGS concluding that TGS should be awarded a refund of all penalties and interest assessed and paid for both audit periods in the amount of $339,579.03, plus interest from the date paid.⁶ On appeal, TGS challenges the trial court's summary judgment in favor of the Comptroller on the issue of tax liability, and the Comptroller challenges the trial court's summary judgment in favor of TGS on the issue of penalties and interest.

ANALYSIS

In three issues, TGS complains that the trial court erred in determining TGS was liable for additional franchise taxes. First, TGS argues that the trial court incorrectly determined that former sections 171.103(4) and 171.1032(4) applied to the gross receipts generated by TGS from its licensing activities. Second, TGS argues that the trial court erred in its conclusion that the Comptroller was uniformly assessing and collecting franchise taxes and, therefore, was not in violation of the United States and Texas Constitutions. Finally, TGS argues that the trial court erred in affirming the Comptroller's use of TGS's customers' shipping or billing address as the location of license use. The Comptroller counters that the trial court correctly applied the relevant statutory provisions to determine that TGS was liable for additional franchise taxes; the trial court correctly concluded that the Comptroller did not violate the United States or Texas Constitution; and, based on the evidence in the record, the trial court correctly affirmed the Comptroller's use of shipping or billing address as the location of license use. On cross-appeal, however, the Comptroller asserts that the trial court erred in its conclusion that the Comptroller abused her discretion in imposing penalties and interest against TGS. For the reasons set forth below, we find no error in the trial court's judgment.

Standard of Review

We review the trial court's decision to grant...