      TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN


                                       NO. 03-12-00515-CV



          Susan Combs, Comptroller of Public Accounts of the State of Texas; and
              Greg Abbott, Attorney General of the State of Texas, Appellants

                                                  v.

                               Newpark Resources, Inc., Appellee


     FROM THE DISTRICT COURT OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT
         NO. D-1-GN-11-002205, HONORABLE TIM SULAK, JUDGE PRESIDING



                              CONCURRING OPINION


               Although I concur in the judgment, I write separately because I believe the

franchise-tax statute obligates us, as a threshold matter, to calculate Newpark’s total revenue. In

order to do that, it is necessary that we address whether Newpark’s flow-through payments to

subcontractors should be excluded from total revenue. See Tex. Tax Code § 171.1011(g)(3)

(specifying that “taxable entity shall exclude from its total revenue” funds burdened by contractual

obligation to be “distributed to other entities”); id. § 171.1011(j) (prohibiting funds excluded from

total revenue from being included in determination of cost-of-goods-sold or compensation

subtractions); cf. Fed. Rev. Rul. 59-92 (Jan. 1, 1959) (setting forth principle that “where a taxpayer

receives funds burdened by an obligation to be expended for a specific purpose and earmarked for

such purpose, the funds so held do not constitute gain or income to the taxpayer”). Although not

directly stated, the majority opinion apparently avoids considering the total-revenue issue on the
basis that it would be “advisory” to consider the matter in light of the parties’ concession that the

result would be the same in this case regardless of whether the disputed revenue were actually

excluded from total revenue (in whole or part).1 I believe this approach disregards the order of

operations dictated by the statute.

               “The distinctive feature of an advisory opinion is that it decides an abstract question

of law without binding the parties.” Texas Ass’n of Bus. v. Texas Air Control Bd., 852 S.W.2d 440,

444 (Tex. 1993); see also State Bar of Tex. v. Gomez, 891 S.W.2d 243, 245 (Tex. 1994) (advisory

opinion is one not binding on parties); Black’s Law Dictionary 1125 (9th ed. 2009) (defining

“advisory opinion” as “[a] nonbinding statement by a court of its interpretation of the law on a matter

submitted for that purpose”). Under the plain language of the franchise-tax statute, matters

implicating total revenue are necessarily antecedent to the COGS subtraction issue as presented in

this case. Moreover, the issue of excluding flow-through payments from total revenue is implicated

in this case, and a decision interpreting that provision would indisputably bind the parties. This is

not a case in which the amount of funds to be included in Newpark’s total-revenue calculation is

undisputed. To the contrary, the parties hotly contest what portion of the funds Newpark received

is actually revenue that is taxable in the first instance. Newpark contends that, by contract, it is

merely a conduit for some funds paid to subcontractors, while the Comptroller maintains that

Newpark does not meet the statutory requirements for excluding subcontractor payments from total


       1
           While the appellants assert that “[t]he resulting tax liability does not differ whether the
subcontractor payments are treated as a revenue exclusion or part of a deduction,” Newpark observes
that the tax refund would be different depending on how the disputed issues are actually resolved
except that the amount of any tax refund would be capped by the amount Newpark actually paid
under protest, plus interest.

                                                  2
revenue. There is nothing hypothetical or abstract about this issue. Accordingly, although I agree

with the result in this case, I fear that the majority opinion may be read to suggest that taxpayers or

taxing authorities can calculate revenue and expenses in any order that is convenient for them

in derogation of express statutory language.          Cf. Bell Helicopter Textron, Inc. v. Combs,

No. 03-10-00764-CV, 2011 WL 6938491, at *1-5 (Tex. App.—Austin Dec. 29, 2011) (mem. op.)

(dispute concerning tax refund ignored plain language of statute that dictated sequence giving rise

to accrual of tax obligations, penalties on underpayments, and interest on overpayments);

Carrollton-Farmers Branch Indep. Sch. Dist. v. JDP, Inc., 168 S.W.3d 184, 187-88 (Tex.

App.—Dallas 2005, no pet.) (in denying refund of portion of penalties and interest calculated on

incorrect appraised value, taxing authority failed to adhere to order of operations dictated by

taxing scheme).

               Under the franchise-tax statute, franchise taxes are assessed against each respective

entity’s “taxable margin.” Tax Code § 171.002(a), (b). There are four methods of computing

taxable margin, and those methods are characterized by the mutually exclusive subtractions

authorized to be made from total revenue depending on the method selected: no subtractions under

the E-Z computation method (Tax Code § 171.1016), a 30% general subtraction (Tax Code

§ 171.101(a)(1)(A)), a subtraction for cost of goods sold (Tax Code § 171.101 (a)(1)(B)(ii)(a)), or

a subtraction for compensation (Tax Code § 171.101(a)(1)(B)(ii)(b)).2 Taxable margin is the figure


       2
           The E-Z computation method offers a potentially lower tax rate of 0.575 percent for
taxpayers “whose total revenue from its entire business is not more than $10 million.” Tax Code
§ 171.1016. However, a taxpayer electing this method “may not take a credit, deduction, or other
adjustment” other than apportioning its gross receipts attributable to business in this state. Id.; see
also id. § 171.106 (apportionment of margin to this state).

                                                  3
on which an entity’s franchise-tax obligation is based, and all four methods of computing taxable

margin require that total revenue be calculated as the first step. Once total revenue is properly

calculated, the taxpayer may elect to make one of three general subtractions along with other

adjustments, as applicable, before applying the tax rate, which is .5% for taxable entities primarily

engaged in retail or wholesale trade and 1% for all others. See, e.g., Tax Code §§ 171.0021, .106

(apportionment of margin to this state), .107 (deduction of cost of solar energy device), .108

(deduction of cost of clean coal project). In the alternative, if the taxpayer has less than $10 million

in total revenue, the taxpayer may elect a lower tax rate of .575% in lieu of making any subtractions

or adjustments other than apportionment of revenue between in-state and out-of-state business. See

id. §§ 171.1016, .106. The tax obligation is then determined by multiplying taxable margin by the

applicable tax rate and subtracting any credits or discounts. See id. § 171.0021 (discounts for small

businesses). Taxpayers can choose any method of determining taxable margin that they qualify for

and that results in the lowest tax obligation. See id. § 171.101(a) (“The taxable margin of a taxable

entity is computed by . . . determining the taxable entity’s margin, which is the lesser of [30% cap

method, COGS subtraction method, or compensation subtraction method].”), .1016 (allowing certain

taxpayers to elect to pay lower franchise-tax rate under E-Z computation method). According to the

plain language of the statute, the amount of total revenue must be the same for all four methods of

calculating taxable margin.

                Although the majority opinion generally acknowledges the formula prescribed by the

statute, including that the COGS subtraction must come after total revenue has been calculated, it

does not further address this predicate legal issue. Along the way, the opinion states that the



                                                   4
taxpayer or taxing entity may choose, at its discretion, whether to exclude sums from total revenue

or subtract them as part of the COGS or compensation subtraction and that the trial court in the

present case therefore “must have concluded that Newpark was entitled to claim [all of] NES’s

expenses . . . in Newpark’s overall cost-of-goods-sold deduction.” See Combs v. Newpark, ___

S.W.3d ___, slip op. at 6 (emphasis added). The opinion also states that “if a taxable entity excludes

flow-through payments to subcontractors from its total revenue, it cannot claim those same payments

in its cost-of-goods-sold deduction.” Id. at 5 n.2 (emphasis added); see also id. at 15 (phrasing

revenue exclusion in discretionary terms while statute uses mandatory terms). The majority opinion

also presumes, without analysis, that funds that are not considered to be part of the taxpayer’s total

revenue—i.e., funds that were not income or gain because the taxpayer was contractually obligated

to hand those funds over to a third party—could nevertheless be properly considered and treated as

the taxpayer’s expenses. In my opinion, these statements are inconsistent with the statute’s plain

language because they treat the exclusion of flow-through payments from total revenue as

discretionary rather than mandatory.

               This is not just a theoretical distinction with no potential substantive impact. With

respect to the COGS subtraction specifically, there is a 4% cap on the inclusion of indirect and

administrative expenses along with a requirement that the total of such expenses be allocable to the

acquisition or production of goods. See Tax Code § 171.1012(f). Ignoring the statutory order of

operations creates a potential that the total indirect and administrative expenses could be inflated,

resulting in an inflation of the amounts subject to the cap. It is difficult to conceptualize all the

possible permutations of revenue, expenses, and allocations that could be affected by the failure to



                                                  5
follow the statutory order of operations. Although there appears to be no actual impact to the

bottom line in this case, that does not justify proceeding in a manner different from what the

statute requires.3

                The COGS subtraction is not an “alternative legal theory” but is an element of

Newpark’s chosen method of computing taxable margin; it is not itself a separate theory of

computing tax liability. Based on the wording of the franchise-tax statute, any determination of the

amount of tax owed necessarily requires a determination of whether the flow-through funds are to

be subtracted from total revenue—either they are excluded in whole or in part or they are not. Only

if it is determined that they should not be subtracted from total revenue is it proper to consider

whether such funds might be otherwise deductible. The relevant legal theory at issue here is the

method of determining taxable margin using the COGS subtraction; while the amount of the COGS

subtraction is an essential element of that theory, so is the antecedent calculation of total revenue.

                I am concerned that we are ignoring the plain language of a statute simply because

the parties say we can do so without impacting the result in a particular case.



                                       _____________________________________________

                                       J. Woodfin Jones, Chief Justice

Before Chief Justice Jones, Justices Pemberton and Field

Filed: December 31, 2013


        3
           Newpark asserts in its brief that its tax liability would in fact vary depending on how the
issues in this case are resolved, but any refund in this action would be capped at the amount of tax
paid under protest.

                                                  6
