News and Insights

Texas Supreme Court Confirms Foreign Military Sales of F-16s Not Texas Gross Receipts

Tax Development May 21, 2020

Lockheed Martin Corp. v. Hegar, No. 18-0566, 2020 Tex. LEXIS 374In Lockheed Martin Corp. v. Hegar, No. 18-0566, 2020 Tex. LEXIS 374 (Tex. May 1, 2020), the Texas Supreme Court (“Court”) held that for franchise tax purposes, sales of F-16 fighter jets by Lockheed Martin Corporation (“Lockheed Martin”) to the governments of Chile, Greece, Israel, Oman, and Poland, which were effected through the U.S. Foreign Military Sales (FMS) program, were not receipts from business conducted in Texas. Therefore, the sales were not includable in the numerator of Lockheed Martin’s Texas franchise tax apportionment factor.

FMS F-16 Sales

During the periods at issue, Lockheed Martin manufactured jets that it had designed and produced for foreign governments at its facility in Fort Worth, Texas. The Arms Export Control Act requires that sales of certain sensitive defense articles (including F-16s) to foreign governments be handled through the FMS program. FMS sales were structured using two contracts: one between Lockheed Martin and the U.S. government and one between the U.S. government and the foreign buyer. The contracts between Lockheed Martin and the U.S. government identified the foreign buyers and required that the F-16s be designed and produced to the buyers’ specifications, including integration into the aircraft of certain equipment to be furnished by the foreign buyers. Each contract also included a Ferry Plan, which defined events, tasks, and personnel associated with the delivery of the aircraft from Lockheed Martin to the foreign buyer. While legal title to the F-16s was transferred to the U.S. government at the facility after inspection and acceptance, Lockheed Martin had various obligations throughout the process of delivering the aircraft to the foreign destinations.

The price to the foreign government in an FMS sale is “the total cost” to the U.S. government of procuring the items because the U.S. government is prohibited by law from realizing any profit or loss from the procurement of the defense articles for the foreign buyer. Also, the foreign government was required “to make funds available in such amounts and at such times as may be required to meet the payments required by the contract.” 

Identity of the Buyer

The question before the Court was whether Lockheed Martin’s F-16 sales receipts should be sourced to Texas for apportionment purposes. The applicable apportionment statute provided that receipts from sales of tangible personal property are Texas gross receipts—includable in the numerator of the Texas apportionment factor—if the property “is delivered or shipped to a buyer in this state [Texas] regardless of the FOB point or another condition of the sale.”1

The dispute in the case largely focused on the identity of the “buyer.” Lockheed Martin argued that the foreign government was the buyer and that each FMS sale was a single transaction “initiated by a foreign-government buyer and effectuated by two interrelated, interdependent contracts, with the United States overseeing the transaction, not as a mere seller, but as a sovereign.” The Comptroller argued that FMS transactions “consisted of two distinct sales: the contractor’s sale of the military goods to the U.S. government, and the U.S. government’s resale of those goods to the foreign purchaser.”

The Court held that, “in the unique circumstances presented by the FMS transactions at issue,…the pertinent ‘buyers’ for Texas franchise-tax purposes are the foreign governments for whom the aircraft were manufactured and to whom they were ultimately delivered.” The Court also agreed with Lockheed Martin’s argument that the FMS requirement that the U.S. government take intermediate title to the goods is a “condition of the sale” to the foreign government, which is expressly disregarded in applying the apportionment statute.

Location of Delivery vs. Location of Buyer

A second question raised in the case was whether the apportionment statute necessitates a “location of delivery test” or a “location of buyer” test. As noted above, the apportionment statute required receipts from sales of tangible personal property to be sourced to Texas if the property was “delivered or shipped to a buyer in this state regardless of the FOB point or another condition of the sale.” The parties disputed whether the phrase “in this state” should be read as modifying the phrase “delivered or shipped” or the word “buyer.” 

The Comptroller’s position was that “in this state” modifies “delivered or shipped” such that the place of delivery controls for apportionment purposes, even if the buyer is located out of state. Lockheed Martin argued that “in this state” modifies “buyer,” meaning that the product’s ultimate destination—the buyer’s location—determines sourcing. The Court declined to resolve this dispute. Having determined that the foreign governments were the buyers of the F-16s, the Court reasoned that, even under the Comptroller’s interpretation, the place at which the property was delivered to the buyer was outside of Texas.


Because the Court’s decision was based on the first question, the identity of the buyer, and because of the “unique circumstances” of the FMS sales at issue, the decision may have limited application to most taxpayers. The broader question of whether the apportionment statute requires a location-of-delivery test or a location-of-buyer test was left unanswered. Nonetheless, defense contractors with FMS sales should evaluate the impact of the decision. Additionally, sellers of tangible personal property should consider whether their franchise tax sourcing methodology is dependent on a “condition of the sale” that should be disregarded under the statute.

1 Former Tex. Tax Code § 171.1032, repealed and recodified at Tex. Tax Code § 171.103, effective January 1, 2008.


Eric L. Stein

Robert Hoyt

Sandi Farquharson

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at