United States

Texas court rules COGS deduction applies to seismic data provider


On March 9, 2016, the Texas Court of Appeals for the Third District issued a decision affirming the trial court’s decision that a business that acquires and processes seismic data for use by the oil and gas industry in developing wells was entitled to claim the costs of goods sold (COGS) deduction in calculating its franchise tax because the data provided was integral to the construction and improvement of its customers’ wells.

The court’s decision was based on its finding that the taxpayer provided labor and materials to clients that used that labor in the construction of real property within the meaning of Texas Tax Code section 171.1012(i), which provides that "[a] taxable entity furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance of real property is considered to be an owner of that labor or materials and may include the costs, as allowed by this section, in the computation of cost of goods sold."

This decision is another in a recent series of cases expanding the applicability of the COGS deduction beyond the comptroller’s narrow approach and offers continued support for an expansive interpretation of the term "labor" in Texas Tax Code section 171.1012(i).

If your business has not previously used, or was denied the use of, the COGS deduction, you should review business activities in relation to the application of the COGS deduction and determine whether to file refund claims.

Mike Williams