Nustar Energy v. Hegar

683 S.W.3d 831

NUSTAR ENERGY, L.P., Appellant

v.Glenn HEGAR, Comptroller of Public Accounts of the State of Texas; and Ken Paxton, Attorney General of the State of Texas, Appellees

NO. 03-21-00669-CV

Court of Appeals of Texas, Austin.

Filed: December 21, 2023

FROM THE 98TH DISTRICT COURT OF TRAVIS COUNTY, NO. D-1-GN-19-000793, THE HONORABLE MARIA CANTU HEXSEL, JUDGE PRESIDING

Doug Sigel, Brock Whalen, Ryan Law Finn PLLC, Terrace I, 2600 Via Fortuna Dr., Suite 150, Austin, TX 78746, for Appellant.

Joseph Keeney, Thales Smith, Assistant Attorney General, Alison Andrews, Office of the Attorney General, Tax Litigation Division, P.O. Box 12548, Austin, TX 78711, for Appellee.

Before Chief Justice Byrne, Justices Kelly and Smith

OPINION

Darlene Byrne, Chief Justice

This permissive appeal involves the construction of Section 171.103(a) of the Tax Code, which governs the apportionment of gross receipts for calculating a business’s franchise tax obligation. See Tex. Tax Code § 171.103 ("Determination of Gross Receipts from Business Done in This State for Margin"). Appellant NuStar Energy, L.P., filed a taxpayer refund suit against appellees Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas (collectively, the "Comptroller"), seeking to recover certain franchise tax payments made under protest. The parties filed competing motions for partial summary judgment addressing the narrow issue of whether the Comptroller had adopted a facially invalid rule that was contrary to Section 171.103(a). See 34 Tex. Admin. Code § 3.591(e)(29)(A), (C), (H), (31) (Comptroller of Public Accounts, Margin: Apportionment) (amended 2021) (current version at 34 Tex. Admin Code § 3.591(e)(29)(A), (C), (H), (e)(32)) (the "Comptroller Rule"). The district court granted the Comptroller’s motion and denied NuStar’s motion, concluding that the Comptroller Rule was facially valid. For the following reasons, we affirm the trial court’s summary judgment order.

BACKGROUND

[1–3] Texas levies a franchise tax on all businesses chartered, organized, or conducting business within Texas. See Tex. Tax Code § 171.001(a). The franchise tax is levied on those businesses "for the privilege of doing business in this State," with the goal that the amount of tax levied "should approximate the value of this privilege." General Dynamics Corp. v. Sharp, 919 S.W.2d 861, 863 (Tex. App.—Austin 1996, writ denied). Because a business may operate across multiple states, countries, or jurisdictions, Texas applies the franchise tax on the business’s "taxable margin," multiplied by the applicable tax rate. See Tex. Tax Code § 171.002 ("Rates; Computation of Tax"); see also Hegar v. Sirius XM Radio, Inc., 660 S.W.3d 277, 280 (Tex. App.—Austin 2022, no pet.). The business’s "taxable margin" is calculated using a three-step process: (1) the business’s margin is calculated based on a statutorily directed percentage of its total revenue; (2) the margin is then apportioned to its business done in Texas; and (3) allowable deductions are subtracted from the apportioned margin to derive the business’s "taxable margin." See Tex. Tax Code §§ 171.101 ("Determination of Taxable Margin"), 171.106 ("Apportionment of Margin to this State"); see also Sirius XM, 660 S.W.3d at 280.

[4, 5] The parties’ dispute centers on the second step, apportioning of NuStar’s taxable margin for the tax years 2011 through 2013.¹ Apportionment is accomplished by "multiplying a business’s total margin, by an apportionment factor." See Hallmark Mktg. Co. v. Hegar, 488 S.W.3d 795, 796 (Tex. 2016). That is, the business’s total margin is multiplied by the percentage of the business’s gross receipts from its business done only in Texas divided by its total gross receipts from its business everywhere (including Texas). See Tex. Tax Code § 171.106(a); Hallmark Marketing, 488 S.W.3d at 796 (explaining that numerator of apportionment factor "consists of receipts from business done in Texas and the denominator consists of receipts from all business"). The more, business done in Texas, the higher the apportionment factor, and the higher the Texas franchise taxes. See Sirius XM, 660 S.W.3d at 280. Thus, determining a business’s gross receipts from its business done in Texas is critical to apportioning the business’s taxable margin.

Section 171.103 of the Texas Tax Code governs which of a business’s gross receipts should be apportioned as business done in Texas. See Tex. Tax Code § 171.106(a) (calculating "the taxable enti- ty’s gross receipts from business done in this state, as determined under Section 171.103"); see also id § 171.103 ("Determination of Gross Receipts from Business Done in This State for Margin"). Relevant here, Section 171.103(a)(1) provides that the following gross receipts are counted as business done within Texas:

(a) Subject to Section 171.1055, in apportioning margin, the gross receipts of a taxable entity from its business done in this state is the sum of the taxable entity’s receipts from:

(1) each sale of tangible personal property if the property is delivered or shipped to a buyer in this state regardless of the FOB point or another condition of the sale;

Id. § 171.103(a)(1) (emphasis added). The Comptroller has adopted rules governing the computation and sourcing of a business’s gross receipts in a variety of commercial contexts. See 34 Tex. Admin. Code § 3.591 (Comptroller of Public Accounts, Margin: Apportionment). NuStar challenges several provisions of Rule 3.591 that apply to the sales of tangible personal property at issue in the underlying dispute:

(29) Tangible personal property. Examples of transactions that involve the sale of tangible personal property and result in Texas receipts include, but are not limited to, the following:

(A) the sale of tangible personal property that is delivered in Texas to a purchaser. Delivery is complete upon transfer of possession or control of the property to the purchaser, an employee of the purchaser, or transportation vehicles that the purchaser leases or owns. FOB point, location of title passage, and other conditions of the sale are not relevant to the determination of Texas gross receipts;

…

(C) the sale and delivery in Texas of tangible personal property that is loaded into a barge, truck, airplane, vessel, tanker, or any other means of conveyance that the purchaser of the property leases and controls or owns. The sale of tangible personal property that is delivered in Texas to an independent contract carrier, common carrier, or freight forwarder that a purchaser of the property hires results only in gross receipts everywhere if the carrier transports or forwards the property to the purchaser outside this state;

…

(H) the drop shipment of tangible personal property in Texas. A drop shipment is a shipment of tangible personal property from a seller directly to a purchaser’s customer, at the request of the purchaser, without passing through the hands of the purchaser. This results in Texas gross receipts for the seller and the purchaser.

…

(31) Texas waters. Revenues from transactions that occur in Texas waters are Texas receipts. Texas waters are considered to extend to 10.359 statute miles, or nine nautical miles, from the Texas coastline.

34 Tex. Admin. Code 3.591(e)(29)(A), (C), (H), (31).²

After paying the disputed franchise taxes relating to those sales, NuStar filed the present tax refund suit against the Comptroller, seeking among other things a declaratory judgment that the disputed subsections of the Comptroller Rule are facially invalid under the Administrative Procedure Act (APA). See Tex. Gov’t Code § 2001.038(a) (providing for declaratory judgment to challenge rule validity). The parties filed cross motions for partial summary judgment on the narrow issue of the rule’s facial validity. On November 5, 2021, the trial court entered a partial summary judgment order, granting the Comptroller’s cross motion for partial summary judgment, denying NuStar’s motion, and concluding that the Comptroller Rule is facially valid.

NuStar filed an unopposed motion to amend the partial summary judgment order, and the district court thereafter amended its order to grant permission for a permissive interlocutory appeal to address whether the Comptroller’s Rule is a valid construction of Section 171.103(a)(1) of the Texas Tax Code. This Court then granted NuStar’s petition for permissive See NuStar Energy, L.P. v. Hegar, No. 03-21-00669-CV, 2022 WL 1158634, at *1 (Tex. App.—Austin Apr. 20, 2022, order); see also Tex. Civ. Prac. & Rem. Code § 51.014(d), (f); Tex. R. App. P. 28.3; Elephant Ins. Co. v. Kenyon, 644 S.W.3d 137, 146–47 (Tex. 2022) (explaining that "permissive appeals are resolved according to the same principles as any other appeal").

STANDARD OF REVIEW

[6] When both parties move for partial summary judgment on the same issue and the trial court grants one motion and denies the other, we conduct a de novo review, considering the evidence presented, determining all questions presented, and if we determine that the trial court erred, rendering the ruling the trial court should have rendered. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005).

[7, 8] The sole issue on appeal is a rule validity challenge, which tests an agency rule adopted under the APA "on procedural and constitutional grounds." Center-Point Energy Houst. Elec., LLC v. Public Util. Comm’n, 354 S.W.3d 899, 902 (Tex. App.—Austin 2011, no pet.). We presume the rule is valid and constitutional, and therefore the challenging party bears the burden of overcoming that presumption. Texas State Bd. of Exam’rs of Marriage & Fam. Therapists v. Texas Med. Ass’n, 511 S.W.3d 28, 33 (Tex. 2017). When, as here, the challenging party contends that the rule is facially invalid, we determine "whether the rule is contrary to the relevant statute." DuPont Photomasks, Inc. v. Strayhorn, 219 S.W.3d 414, 420 (Tex....