Texas Supreme Court’s Decision In GRAPHIC PACKAGING CORP. V. GLENN HEGAR

February 27, 2018

On December 22, 2017 the Texas Supreme Court issued an important decision regarding the Texas Franchise Tax in Graphic Packaging Corp. v. Hegar.


Graphic Packaging Corporation sold consumer product packaging throughout the United States, including Texas. As a business entity operating in Texas, Graphic Packaging was subject to the Texas Franchise Tax. To calculate the amount of Franchise Tax Graphic Packaging owed, it used a three factor apportionment formula found in Tax Code § 141.001. Section 141.001 allows the use of a three-factor formula when calculating the tax base for the purposes of an income tax. The three-factor formula consisted of Graphic Packaging’s sales, payroll, and property in Texas over its total sales, payroll, and property in the United States. Graphic Packaging argued that Texas Franchise Tax is analogous to an income tax, and as such the three factor formula—which lowered its taxable amount—was appropriate.

However, the Comptroller argued that the use of a three-factor apportionment formula was prohibited because Texas Tax Code § 171.106 allowed only for the use of single-factor apportionment formula: sales in Texas over total sales in the United States.


Graphic Packaging filed suit in District Court arguing that the Texas Franchise Tax was an income tax. The district court granted summary judgment in favor of the Comptroller and the Court of Appeals affirmed, holding that the Texas Franchise Tax was not an income tax and that the use of a three factor-formula was not appropriate.

Texas Supreme Court’s Decision:

The Texas Supreme Court considered three issues in its review of the appellate court’s decision: (1) whether the Texas Franchise Tax is an income tax, (2) whether Tax Code § 171.106 precludes a taxpayer from using the three-factor formula, and (3) whether Texas’ membership in the Multistate Tax Compact prevents the Texas Legislature from requiring a taxpayer to use only the single-factor formula when apportioning its tax base to Texas.

The Texas Supreme Court elected not to decide whether the Franchise Tax is an income tax. Instead the Court affirmed the appellate court’s holding, favoring the Comptroller, on issues two and three.

First, the Court decided that the text of § 171.106—requiring the use of a single-factor formula— produced an irreconcilable conflict with § 141.001—allowing the use of a three-factor formula. To resolve the conflict, the Court held that statutes passed later in time prevailed over older statutes. The court also held that statutes that were more specific on an issue superseded more general statutes. Section § 171.106 was passed roughly two decades after § 141.001, and it was more specific on how to calculate the tax base for the Franchise Tax, thus § 171.106 controlled.

Next, the Court held that Multistate Tax Compact—which Texas is a member—did not prevent the Texas Legislature from making the single-factor formula the exclusive means of calculating the tax base for the Franchise Tax because it was not a binding regulatory compact.