Texas does not let companies providing services — as opposed to selling goods — deduct costs when calculating income subject to state franchise taxes.

A telephone company lost an effort to reduce its state franchise taxes in a Texas appeals court in September.

MetTel pays rent to other telecom companies to lease lines that it uses to provide telephone and internet service to customers.

Texas collects annual franchise taxes from companies doing business in the state. The tax is a set percentage of a form of income called “taxable margin.” A company can deduct its “costs of goods sold” when calculating its taxable margin, but it must sell goods to qualify for a such a deduction. Goods are tangible property, meaning things that “can be seen, weighed, measured, felt, or touched or that [are] perceptible to the senses in any other manner.”

MetTel paid franchise taxes in 2011 through 2014 on its net income after deducting its costs to provide telephone and internet services. The state disallowed the deductions. MetTel lost in both the lower court and the appeals court. Both said MetTel is providing services rather than selling tangible property.

The appeals court released its decision in late August. The case is Metropolitan Telecommunications Holding Company v. Hegar.

Power companies face similar issues. State decisions on whether electricity is tangible personal property have varied. (See, for example, “Colorado” in the August 2014 NewsWire, “Electricity Is Not Tangible Property” in the August 2016 NewsWire, and “Power Plants and Use Taxes” in the April 2017 NewsWire.)