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Texas Third Court of Appeals Finds that Geoseismic Company Can Take COGS for Franchise Tax Purposes

Tax Development Mar 10, 2016

On March 9, 2016, in Glenn Hegar v. CGG Veritas Services (U.S.), Inc., the Texas Third Court of Appeals (“Court”) found that Tax Code Sec. 171.1012(i) allowed CGG Veritas Services (U.S.), Inc. (“CGG”), a geoseismic company, to deduct its cost of goods sold (COGS) listed in Section 171.1012 in computing its 2008 Report Franchise Tax. Subsection (i) 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 costs of goods sold.” CGG provided conclusive evidence that it furnished labor and materials to projects for the construction of oil and gas wells, which are real property. As a result, the trial court’s ruling in favor of CGG was upheld.

In considering whether CGG furnished “services” as argued by the Comptroller, the Court looked to Combs v. Newpark Res., Inc. 422 S.W.3d 46, 56 (Tex. App.—Austin 2013, no pet.) in which it found that the Legislature intended COGS to include a wide range of labor expenses, even those that might be described as a service. Further, the Court explained that the proper analytical framework was to look at the facts of the case and whether the particular activity is an essential and direct component of the project for the construction of real property. In addition to the trial court’s finding of fact that the “seismic services and products are an integral, essential, and direct component of the oil and gas drilling process,” the Court also noted that the evidence showed that the seismic data provides a guide for where and how deep to drill the wells, and that a well could not reasonably be drilled without the information. No contrary evidence was presented to the district court regarding whether the activities were too far removed from the construction to constitute the furnishing of labor and materials to the construction project.


Eric L. Stein

Sandi Farquharson