Swift Transportation Co. of Arizona, LLC (“Swift”) is the reporting entity for a combined group of affiliated motor carriers that transport property for hire. Swift filed a refund request for Texas franchise tax paid for report years 2013 through 2016, contending they were exempt from the franchise tax under Texas Tax Code § 171.081 and Transportation Code § 20.001. The Transportation Code statute exempts motor carriers from “any occupation tax measured by gross receipts.”
After the trial court denied its requested partial summary judgment, Swift filed an appeal that was transferred to the Thirteenth Court of Appeals, which promptly held that the Texas franchise tax is not an occupation tax but did not address whether it is measured by gross receipts.1 Subsequently, Swift petitioned the Texas Supreme Court for review on the two issues.
Swift contends the appellate court did not apply the plain and ordinary meaning of the statute’s terms and ignored caselaw and dictionary definitions in determining that the franchise tax was not a type of occupation tax. Swift maintains that both the franchise tax and an occupation tax are imposed for or on the privilege of carrying on a business. It relies on the Texas Supreme Court’s discussion in Nestle that “Black’s Law Dictionary defines [the franchise tax and occupation tax] each the same way: a ‘tax imposed [for or on] the privilege of carrying on a business.’”2 In addition, the Third Court of Appeals has stated in United Servs. that “‘[f]ranchise tax’ refers to a tax levied on the value of the privilege to conduct business in this state...and is also a type of occupation tax.”3 Following Tax Code § 171.101(a)(1)(A), taxable margin can be determined by multiplying total revenue by 70%, which is multiplied by an apportionment factor comprised of gross receipts under Tax Code 171.106(a), both of which were used to support its position that the franchise tax is measured by gross receipts.
In its response to the petition, the state asserts that the franchise tax is neither an occupation tax nor is it measured by gross receipts. The state asserts that the legislative intent is clear and unambiguous, and the Legislature has not treated the two taxes in the same manner. Other occupation taxes apply to only specific professions, while the franchise tax applies generally to all business entities. In its argument against the second issue raised, the state draws a distinction between “gross receipts” and “total revenue,” as the franchise tax is based on taxable margin, which starts with “total revenue.” It argues that the adjustments made to the starting point under Tax Code § 171.1011 further remove the tax from the typical gross receipts tax regime.
The Supreme Court has yet to determine if it will allow a full review of this case. We will keep you updated as this case progresses through the court system and how this could impact your business. Please reach out to one of the experts below with any questions.
1 Swift Transportation Co. of Arizona, LLC v. Hegar, 2022 WL 16841421 (Tex. App.—Corpus Christi-Edinburg November 10, 2022, pet. pending) (mem. op.).
2 In re Nestle USA, Inc. 387 S.W.3d 610, 621 (Tex. 2012); See also, Conlen Grain & Mercantile, Inc. v. Tex. Grain Sorghum Producers Bd., 519 S.W.2d 620, 624 (Tex. 1975); State v. Galveston, H. & S.A. Ry. Co., 100 Tex. 153, 173, 97 S.W. 71, 77 (1906).
3 United Servs. Auto Ass'n v. Strayhorn, 124 S.W.3d 722, 725 n. 4 (Tex. App.—Austin 2003, pet. denied).
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