News and Insights

Texas Supreme Court Finds that Net Gain Does Not Include “Net Loss” for Franchise Tax

Tax Development Apr 21, 2016

On April 15, 2016, the Texas Supreme Court (“Supreme Court”) in Hallmark Marketing Company, LLC v. Glenn Hegar found that a business is not required to include a net loss in the calculation of its everywhere gross receipts (“everywhere receipts”) for franchise tax apportionment purposes. Tex. Tax Code Sec. 171.105 provides that a taxpayer must include in its calculation of everywhere receipts a net gain from a sale of its investments. The inclusion of a net gain increases the denominator used to apportion franchise tax, which may decrease a taxpayer’s apportionment percentage and its franchise tax liability.

When the Comptroller included Hallmark’s net loss in its everywhere receipts, the inclusion increased Hallmark’s Texas franchise tax liability. Hallmark argued that the law only requires the inclusion of a net gain, not a net loss and filed suit. The Thirteenth Court of Appeals ruled in favor of the Comptroller, concluding the agency’s administrative rule was entitled to deference because “net gain” is ambiguous.

The Supreme Court did not agree. In reversing the Thirteenth Court’s decision, the Supreme Court explained that it defers to an agency’s reasonable interpretation of the law when the statute is ambiguous. An agency’s opinion, however, cannot change the plain language of the statute.

In this case, the law provides that only the net gains are included in everywhere receipts, and “under no reading can ‘net gain’ include a net loss.” Further, the Comptroller’s rule, 34 TAC 3.591, which requires a taxpayer to include a net loss in everywhere receipts, is in conflict with the clear language of the law. Because the plain language of the law only provides for the inclusion of net gains from the sales of investments, Hallmark was not required to include its net loss in everywhere receipts. 


Eric L. Stein

Sandi Farquharson