Upjohn Co. v. Rylander

• Decision Date: 19 October 2000
• Citation: 38 S.W.3d 600
• Parties: (Tex.App.-Austin 2000) The Upjohn Company, Appellant v. Carole Keeton Rylander, Comptroller of Public Accounts of the State of Texas; and John Cornyn, Attorney General of the State of Texas, Appellees NO. 03-00-00055-CV
• Court: Texas Court of Appeals

Page 600

38 S.W.3d 600 (Tex.App.-Austin 2000)

The Upjohn Company, Appellant v. Carole Keeton Rylander, Comptroller of Public Accounts of the State of Texas; and John Cornyn, Attorney General of the State of Texas, Appellees

NO. 03-00-00055-CV

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

October 19, 2000

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT NO. 98-03809, HONORABLE DERWOOD JOHNSON, JUDGE PRESIDING

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Before Chief Justice Aboussie, Justices B. A. Smith and Patterson

Patterson, Justice

This is a franchise tax case.¹ The Upjohn Company sued the Comptroller² for a refund of $1,391,740.40 in franchise taxes and interest paid under protest on receipts generated by its Texas sales of drugs and medicines. Both parties filed motions for summary judgment. The district court granted the Comptroller's motion and denied Upjohn's motion.

The question in this case is whether section 171.104 of the Texas Tax Code permits a taxpayer to exclude receipts generated from its Texas sales of drugs and medicines when its franchise taxes are based on either taxable capital or earned surplus. Tex. Tax Code Ann. § 171.104 (West 1992 & Supp. 2000). We hold that, in calculating its earned surplus gross receipts apportionment factor, Upjohn may not exclude these sales from its gross receipts. We affirm the district court's judgment.

Franchise Tax Background

A franchise tax is imposed on corporations for the privilege of doing business in Texas. See Tex. Tax Code Ann. § 171.001(a)(1) (West 1992 & Supp. 2000); Bullock v. National Bancshares Corp., 584 S.W.2d 268, 270 (Tex. 1979). The franchise tax is imposed annually on each corporation that is incorporated in Texas or that conducts business in Texas. See Tex. Tax Code Ann. § 171.001 (West 1992 & Supp. 2000). A corporation's franchise tax liability is based on the business done by the corporation during its last accounting period, which ends in the year before the tax is due. See id. §§ 171.151, .153, .1532.

Prior to 1992, the franchise tax was based solely on a corporation's taxable capital.³ Because the franchise tax was based solely on taxable capital, capital-intensive industries bore the brunt of the tax, even in unprofitable years. See General Dynamics Corp. v. Sharp, 919 S.W.2d 861, 863 (Tex. App.-Austin 1996, writ denied). On the other hand, service industries, even those generating large profits, did not pay as much, unless they were also capital intensive. See id.

In 1991, the Texas Legislature amended the Franchise Tax Act to add earned surplus as an additional tax base from which to calculate the franchise tax. See Act of Aug. 12, 1991, 72d Leg., 1st C.S., ch. 5, § 8.02, 1991 Tex. Gen. Laws 134, 152. The amendment to the franchise tax changed the tax base to the greater of a corporation's net taxable capital apportioned to Texas or the corporation's taxable earned surplus apportioned to Texas. See Tex. Tax Code Ann. § 171.002 (West 1992 & Supp. 2000).⁴ Thus, the 1991 amendment to the franchise tax reapportioned the tax base.

The tax is calculated by multiplying the franchise tax base by the franchise tax rate. See id. Upjohn's taxable capital and earned surplus are subject to franchise tax in Texas based on the percentage of its business apportioned to Texas multiplied by the appropriate tax rate. See id. § 171.106. The determination of the portion of the tax base attributable to Texas, the "apportionment ratio," is calculated by dividing the corporation's gross receipts attributable to Texas by the corporation's total gross receipts.⁵ See id. The tax on the higher of the calculation of taxable capital or earned surplus determines Upjohn's franchise tax obligation. See id. §§ 171.002, .106, .110.

The Controversy

In calculating its franchise tax based on its earned surplus apportioned to Texas, Upjohn, an international pharmaceutical corporation, had excluded receipts generated by its Texas sales of certain drugs and medicines from the numerator of its gross receipts apportionment factor. Upjohn was audited by the Comptroller for the report years 1992 through 1995. As a result of the audit, the auditor increased Upjohn's Texas receipts, i.e., the numerator of the fraction. The inclusion of the receipts in the numerator of Upjohn's gross receipts apportionment factor resulted in a tax deficiency of $1,391,740.40.

As a result, Upjohn paid franchise tax in the amount of $956,135.84 and $435,604.56 in interest under protest. See Tex. Tax Code Ann. §§ 112.051-.060 (West 1992 & Supp. 2000). Upjohn filed suit against the Comptroller in an effort to recoup the protested franchise tax. The district court granted the Comptroller's motion for summary judgment, and Upjohn appeals to this Court.

In this appeal, Upjohn contends that section 171.104 of the Texas Tax Code provides for the exclusion of drug and medicine receipts from gross receipts for purposes of apportioning both taxable capital and earned surplus.

DISCUSSION

The parties do not dispute the facts material to this case. Consequently, the propriety of summary judgment is a question of law. See Natividad v. Alexsis, Inc., 875 S.W.2d 695, 699 (Tex. 1994). We therefore review the district court's decision de novo to determine whether the Comptroller was entitled to judgment as a matter of law. See id.; Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548-49 (Tex. 1985). Where both parties file a motion for summary judgment, and one is granted and one is denied, we determine all questions presented and render such judgment as the trial court should have rendered. See Commissioners Court v. Agan, 940 S.W.2d 77, 80 (Tex. 1997).

Tax Code Section 171.104

The section at the heart of this dispute, Tax Code section 171.104, provides for the deduction of certain drug and medicine receipts from gross receipts as follows:

Gross Receipts From Business Done in Texas: Deduction for Food and Medicine Receipts

A corporation may deduct from its receipts includable under Section 171.103(1) of this code the amount of the corporation's receipts from sales of the following items, if the items are shipped from outside this state and the receipts would be includable under Section 171.103(1) of this code in the absence of this section:

(1) food that is exempted from the Limited Sales, Excise, and Use Tax Act by Section 151.314(a) of this code; and

(2) health care supplies that are exempted from the Limited Sales, Excise, and Use Tax Act by Section 151.313 of this code.

Tex. Tax Code Ann. § 171.104. The section specifically referenced, section 171.103, is entitled "Determination of Gross Receipts From Business Done in this State for Taxable Capital" and defines the categories of receipts that are included in gross receipts for purposes of calculating taxable capital. Id. § 171.103 (West 1992 & Supp. 2000) (emphasis added). Subsection (1) of that section provides for including in the apportionment ratio numerator for taxable capital purposes receipts from "each sale of tangible personal property if the property is delivered or shipped to a buyer in [Texas]." Id. § 171.103(1).

Section 171.1032, entitled "Determination of Gross Receipts From Business Done in this State for Taxable Earned Surplus," defines the type of receipts included in gross receipts for purposes of calculating taxable earned surplus. Id. § 171.1032. Its subsection (1) contains language identical to that of subsection (1) of section 171.103 with regard to "tangible personal property." Compare id. § 171.1032(1), with id. § 171.103(1).

Because the sections defining gross receipts for calculation of both taxable capital and earned surplus contain identical subsections relating to the "sale of tangible personal property," Upjohn argues that section 171.104 is "unintentionally worded" to specifically refer only to the apportionment ratio used for calculating taxable capital and not the apportionment ratio used to calculate earned surplus. Upjohn contends that section 171.104 excludes drug and medicine receipts from the numerator of the gross receipts factor for purposes of computing both earned surplus and taxable capital. The Comptroller contends that section 171.104 applies only to taxable capital and that the language is clear and unambiguous on its face.

As a preliminary matter, Upjohn urges that because the tax in question is an imposition of a tax rather than an exemption, it should be liberally construed in favor of the taxpayer. Whether we characterize the tax as an imposition of a tax or an exemption from tax determines who bears the burden of proving its application. The Legislature enacts statutes imposing franchise tax purely for revenue purposes. See Federal Crude Oil Co. v. Yount-Lee Oil Co., 52 S.W.2d 56, 61 (Tex. 1932). We therefore liberally construe franchise tax statutes so as to effectuate their purpose. See id.; see also Isbell v. Gulf Union Oil Co., 209 S.W.2d 762, 764 (Tex. 1948); Davis v. State, 846 S.W.2d 564, 570 (Tex. App.-Austin 1993, no writ). Statutes imposing a tax must be strictly construed against the taxing authority and liberally construed in favor of the taxpayer. See Arch Petroleum, Inc. v. Sharp, 958 S.W.2d 475, 478 (Tex. App.-Austin 1997, no pet.). Deductions and exemptions, on the other hand, are matters of legislative "grace." See Commissioner of Internal Revenue v. Sullivan, 356 U.S. 27, 28 (1958). "[T]o promote uniformity and equality in taxation, we construe tax exemptions--and provisions tantamount to tax exemptions--strictly against the taxpayer and in favor of the taxing authority."⁶ Texas Utils. Elec. Co. v. Sharp, 962 S.W.2d 723, 726 (Tex. App.-Austin 1998, pet denied); accord National Bancshares Corp., 584 S.W.2d at 271-72. Because section 171.104 is part of an apportionment formula, which determines the part of the tax base that is properly attributable to the State, Upjohn contends that it should be considered an ...