RYAN LAW FIRM, LLP WINS FRANCHISE TAX CASE FOR XEROX
January 9, 2019
XEROX CORPORATION V. HEGAR
The Travis County District Court has recently ruled that Xerox Corporation (“Xerox”), represented by Doug Sigel and Rich Moore, was eligible for the 0.5% franchise tax rate because its activities constituted “wholesale trade” under the Texas Tax Code.
Xerox sells and leases computer peripheral equipment throughout the State of Texas.
To qualify for the 0.5% franchise tax rate, a taxpayer must be (1) primarily engaged in “wholesale” or “retail” trade, and (2) cannot produce more than 50% of its wholesale or retail trade products. “Wholesale trade” is defined in Texas Tax Code § 171.0001(18) by reference to Division F of the 1987 Standard Industrial Classification (SIC) Manual. The Comptroller asserted that Xerox’s activities were described by Division D (Manufacturing) and Division I (Services).
Relying on the Court of Appeals decision in Rent-A-Center, the Honorable Dustin Howell found in favor of Xerox, holding that the relevant question was whether its activities were more like selling than leasing. Thorough evidence was presented regarding Xerox’s sales-type leases, which were a hybrid agreement used to sell its equipment.
The court found that the sales-type leases were more like sales than leases and properly calculated the sales-type lease revenue as “wholesale trade” revenue under the Texas Tax Code.
The Ryan Law team also successfully defended a counterclaim by the Comptroller, that Xerox’s cost of goods sold (“COGS”) was overstated. Evidence was presented that not only was Xerox’s COGS not overstated, but that it was in fact understated, and Judge Howell denied the Comptroller’s counterclaim entirely.
For more information, contact:
Practice Group Leader, Sales & Use and Income Tax
Associate, Sale & Use and Income Tax