Hegar v. Xerox Corp.

Hegar v. Xerox Corp.

Opinion

 [*300]  In this franchise-tax dispute, the taxable entity paid franchise taxes under protest and brought suit asserting that the franchise tax rate applicable to the entity during Report Years 2008 and 2009 was 0.5% rather than 1.0%. The Comptroller of Public Accounts of the State of Texas and the Attorney General of the State of Texas counterclaimed, asserting that the taxable entity's cost-of-good-sold deduction should have been less than the amounts reported  [*301]  by the entity in each of these years. The trial court ruled in the taxable entity's favor on its claims and ordered that the defendants take nothing on their counterclaims. On appeal, the defendants assert that the trial court erred in determining that the applicable franchise tax rate during the time period at issue was 0.5% rather than 1.0% and that the trial court erred in rendering a take-nothing judgment on their counterclaim. We affirm the trial court's judgment.

I. Factual and Procedural Background

Following an audit, appellant/defendant Glenn Hegar, the Comptroller [**2]  of Public Accounts of the State of Texas (the "Comptroller") determined that the applicable franchise tax rate for appellee/plaintiff Xerox Corporation for Report Years 2008 and 2009 (the "Time Period at Issue") was 1.0% rather than 0.5%. Xerox had used the 0.5% tax rate to compute its franchise tax during the Time Period at Issue because Xerox contended that it was primarily engaged in wholesale trade under Texas Tax Code section 171.002(c) during this time period. The Comptroller disagreed with this contention. In June 2017, the Comptroller assessed more than $2.1 million against Xerox in franchise tax and interest for Report Year 2008 and more than $2.2 million in franchise tax and interest for Report Year 2009. Xerox paid the assessed amounts under protest and filed this suit under Chapters 112 and 171 of the Texas Tax Code to recover the disputed amounts.

Xerox sued the Comptroller and appellant/defendant Ken Paxton, Attorney General of the State of Texas (collectively, the "Comptroller Parties"). The Comptroller Parties filed a counterclaim against Xerox alleging that during the Time Period at Issue Xerox had overstated its cost of goods sold ("COGS"). The Comptroller Parties alleged that during each report year [**3]  Xerox's COGS deduction should have been much less than the amount reported by Xerox. The Comptroller Parties argued that the amount of Xerox's COGS was less than thirty percent of its total revenue for each report year.

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