• Margin [Tax] Call: Texas Appellate Court Holds COGS Deduction Eligibility Determined on Combined Group Basis
  • March 3, 2014 | Authors: Madison J. Barnett; Timothy A. Gustafson
  • Law Firms: Sutherland Asbill & Brennan LLP - Atlanta Office ; Sutherland Asbill & Brennan LLP - Sacramento Office
  • In the first appellate decision arising from a Texas Margin Tax audit, the Texas Court of Appeals ruled in favor of the taxpayer, holding that a combined group’s eligibility for the cost of goods sold (COGS) deduction is determined on a group-wide rather than a separate-entity basis. The Comptroller denied the portion of the combined group’s COGS deduction attributable to a subsidiary that injected and removed “drilling mud” as part of the combined group’s oil and gas well drilling services. In the Comptroller’s view, the subsidiary was a service provider and thus was ineligible for the COGS deduction. The court rejected this view and held that “each member’s [COGS] deduction must be determined by considering the member’s expenses in the context of the combined group’s overall business.” The court further held that the subsidiary’s waste disposal labor costs were properly included in the COGS deduction because they constituted labor furnished to a project for the construction or improvement of real property, i.e., to the drilling of oil and gas wells. Combs v. Newpark Resources, Inc., No. 03-12-00515-CV (Tex. App. Dec. 31, 2013).