Federal Law Preempts Texas Franchise Tax on Airline Revenues

On April 9, 2026, the Texas Court of Appeals ruled that the federal Anti-Head Tax Act (AHTA) preempts states from imposing the franchise tax on certain transportation revenues (passenger ticket sales, baggage fees, and freight transportation) received by American Airlines (“American”).¹ The court concluded that the franchise tax is a tax on gross receipts, triggering the federal preemption, and rejected claims by the Comptroller of Public Accounts (“Comptroller”) that the franchise tax is actually a composite tax on an entity’s entire business.

Under the AHTA, states are barred from imposing a tax on the gross receipts from air commerce or transportation. The prohibition does not extend to income, sales and use, franchise, or property taxes. In 2014, the Comptroller requested that the U.S. Department of Transportation (DOT) agree with its interpretation that the AHTA did not preempt imposition of the Texas franchise tax as applied to American’s transportation revenues. The DOT disagreed with the Comptroller. Based on the DOT’s conclusion, American sought a franchise tax refund for baggage fee revenue. The Comptroller counterclaimed and issued an assessment for franchise tax based on passenger ticket sales and freight transportation. A trial court ruled in favor of American, stating that the franchise tax is a tax on gross receipts because there are no deductions or exclusions from the sources of revenue. This appeal ensued.

AHTA preemption turns on whether the franchise tax is imposed on or measured by the gross receipts from American’s transportation revenues. The court concluded that it was and ruled in favor of American. The Comptroller had argued that the franchise tax is a composite tax based on a taxable entity’s entire business and levied on taxable margin. Gross receipts, the Comptroller opined, are but an element of taxable margin and not what the tax is imposed on. The Comptroller noted that the total revenue calculation permits various deductions and exclusions (bad debt expense, foreign royalties), the availability of a compensation deduction, and that margin adjustments, apportionment, and other factors reflect an entity’s overall business structure and activities. These claims were rejected.

The court noted that the Comptroller had previously found that the mere existence of exclusions and deductions does not save the franchise tax from AHTA preemption. The court noted that in a New York case² cited favorably by the Supreme Court, the AHTA was found to preempt New York’s franchise tax on gross earnings that included various components besides gross receipts. In this instance, the Texas franchise tax contains various components, including the gross receipts from American’s transportation revenues. The franchise tax’s deductions and exclusions do not save it from AHTA preemption.

Ryan’s Take and Action Steps

The Comptroller has 45 days to file an appeal with the state supreme court. It’s notable that the Comptroller’s opinion regarding preemption has not been consistent―it has in the past allowed preemption with regard to ticket sales, for instance. While commercial carriers may seem to be the most obviously impacted, they benefit from favorable apportionment rules that only source intrastate flights. Charter providers, cargo air transportation providers, third-party sellers of air transportation services, and other providers of air transportation services should also review their revenue streams and margin tax calculations to see whether they can benefit from this decision.

¹ Hancock v. American Airlines, Inc., Texas Ct. App. (15^th), Dkt. No. 15-24-00013-CV, (April 9, 2026).

² Air Transp. Ass’n of Am. v. New York State Dep’t of Tax’n and Fin., 91 A.D.2d 169 (App. Div.), aff’d, 59 N.Y.2d 917.

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