Martens, Todd & Leonard: Oilfield Service Provider Wins Major Texas Franchise Tax Victory

Jan 02, 2014, 18:55 ET from Martens, Todd & Leonard

AUSTIN, Texas, Jan. 2, 2014 /PRNewswire/ -- On the last day of 2013, the Texas court of appeals presiding in Austin, Texas held that the expenses of a waste transportation and disposal company are included in the cost of goods sold deduction under the Texas franchise tax (margin tax). The company, Newpark Environmental Services, is a subsidiary of Newpark Resources, a fully-integrated oilfield service provider. Newpark Resources sold and injected drilling mud in offshore oils wells. The drilling companies use the mud to lubricate drilling bits during the drilling process. The mud is also used to flush the drilling cuttings (pieces of rock) to the surface where the Newpark Environmental Services subsidiary receives it as waste. Newpark Environmental Services transports the waste to its onshore facilities where it injects the waste into permanent storage domes.

The Texas franchise tax, commonly known as the "Texas margin tax," is based upon a business's net income, but with limited expenses. One of the largest categories of expenses is Cost of Goods Sold (COGS). While the COGS deduction is typically used by businesses that sell products, there is a special provision that allows businesses that provide labor or materials to construction projects to qualify as well. The court held that oil & gas wells are construction projects and that the expenses of the waste subsidiary qualify for the COGS deduction.

Under the Texas franchise tax, related companies file as a single taxpayer. The Texas Comptroller, however, took the position that it could treat the related companies as separate businesses and tax them accordingly. The appeals court rejected that position as inconsistent with the plain language of the statute and held for the taxpayer, Newpark.

The decision is also significant because it rejects the Texas Comptroller's policy that no business that provides services is eligible for the COGS deduction. Businesses providing services that are essential to a construction project, whether its homes, office buildings or oil & gas wells may qualify for the COGS deduction.

The decision is not yet final. Due to its potential impact, the Texas Comptroller has indicated that they will seek review by the Texas Supreme Court.

For more information, contact Jimmy Martens, Lacy Leonard or Danielle Ahlrich with Martens, Todd & Leonard, the law firm that represented Newpark at trial and on appeal, at (512) 542-9898.

About Martens, Todd & Leonard

Martens, Todd & Leonard is a trial and appellate law firm headquartered in Austin, Texas, handling only tax cases. The firm specializes in Texas franchise and Texas sales tax cases. The firm's attorneys have handled cases all the way through the Texas Supreme Court and U.S. Supreme Court. The firm's attorneys speak and write frequently on a variety of Texas franchise and sales tax topics, and have published articles in publications such as The Journal of State Taxation, the Texas Bar Journal, the Texas Lawyer, and the Texas Tech Administrative Law Journal. For more information, or to obtain a copy of the Newpark decision, please visit http://www.textaxlaw.com.

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