                                                                                                ACCEPTED
                                                                                            03-14-00713-CV
                                                                                                    6651692
                                                                                 THIRD COURT OF APPEALS
                                                                                            AUSTIN, TEXAS
                                                                                       8/25/2015 8:06:11 PM
                                                                                          JEFFREY D. KYLE
                                                                                                     CLERK
                               No. 03-14-00713-CV

                     In the Court of Appeals 3rd COURT  FILED IN
                                                             OF APPEALS
                                                     AUSTIN, TEXAS
                  for the Third Judicial District9/2/2015 2:04:11 PM
                          Austin, Texas            JEFFREY D. KYLE
                                                         Clerk



GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS, AND
        KEN PAXTON, ATTORNEY GENERAL OF THE STATE OF TEXAS,
                                         Appellants,
                                        v.
                       CGG VERITAS SERVICES (U.S.), INC.,
                                               Appellee.

                               On Appeal from the
               353rd Judicial District Court of Travis County, Texas

                            APPELLANTS’ REPLY BRIEF


KEN PAXTON                                       SCOTT A. KELLER
Attorney General of Texas                        Solicitor General

CHARLES E. ROY                                   JOSEPH D. HUGHES
First Assistant Attorney General                 Assistant Solicitor General
                                                 State Bar No. 24007410
                                                 jody.hughes@texasattorneygeneral.gov

OFFICE OF THE ATTORNEY GENERAL                   AUTUMN HAMIT PATTERSON
P.O. Box 12548 (MC 059)                          Assistant Attorney General
Austin, Texas 78711-2548                         State Bar No. 24092947
Tel.: (512) 936-1729
Fax: (512) 474-2697                              COUNSEL FOR APPELLANTS
                                                    TABLE OF CONTENTS

Index of Authorities ................................................................................................................. iii 

Argument .................................................................................................................................... 2 

           I.         CGG Misframes the Inquiry. ........................................................................... 2 

                      A.         This Appeal Involves Statutory Construction, a Question of
                                 Law. .......................................................................................................... 2 

                      B.         Section 171.1012 Determines Whether an Entity’s Costs
                                 Qualify for the Cost of Goods Sold Deduction. ............................... 3 

                                 1.         CGG’s “threshold inquiry” contradicts the statute............... 3 

                                 2.         Section 171.1012(i)’s “labor or materials” provision
                                            does not allow a deemed owner of labor or materials
                                            to take a COGS deduction for costs other than for
                                            “that labor or materials.” ........................................................... 4 

                                 3.         Newpark Resources supports the Comptroller’s
                                            construction................................................................................. 6 

                                 4.         Estoppel is not a valid method of statutory
                                            construction................................................................................. 7 

                      C.         It Was CGG’s Burden to Prove the Eligibility of Its Claimed
                                 Costs. ........................................................................................................ 8 

           II.        CGG’s Seismic-Data Costs Are Not Eligible for the COGS
                      Deduction Because CGG Produces No “Goods.” .................................... 11 

                      A.         CGG Provides a Service; It Does Not Sell Tangible
                                 Property. ................................................................................................12 

                                 1.         CGG’s seismic data is intangible property. ..........................13 

                                 2.         CGG uses its seismic data to provide its clients with
                                            seismic maps representing CGG’s opinion regarding
                                            the underground topography. .................................................13 
                      B.         CGG’s Concessions Make It Unnecessary for the Court to
                                 Address the Parties’ Arguments Regarding Section
                                 171.1012(a)(3)(A)(ii). ............................................................................16 

           III.       CGG Is Not a Deemed Owner of Goods Under Section
                      171.1012(i) and Cannot Qualify for That Section’s Narrow “Labor
                      or Materials” Exception. ................................................................................. 17 

                      A.         CGG’s Provision of Sophisticated Data-Processing Services
                                 Is Not “Furnishing Labor or Materials.” ..........................................18 

                                 1.          CGG is not furnishing “labor.” .............................................18 

                                 2.          The cost of CGG’s seismic services can be deducted
                                             by drilling companies but not CGG. .....................................21 

                      B.         CGG’s Seismic Data Is Not Furnished to a Construction
                                 Project. ...................................................................................................22 

                      C.         CGG Cannot Legitimately Claim That All of Its Costs Are
                                 for “Labor or Materials.” ....................................................................25 

Prayer .........................................................................................................................................25 

Certificate of Service ...............................................................................................................27 

Certificate of Compliance ......................................................................................................27 




                                                                        ii
                                            INDEX OF AUTHORITIES

Cases 

Alon USA, LP v. State,
   222 S.W.3d 19 (Tex. App.—Austin 2005, pet. denied) ................................................. 9

Bullock v. Foley Bros. Dry Goods Corp.,
   802 S.W.2d 835 (Tex. App.—Austin 1991, writ denied) .............................................10

Combs v. Newpark Res., Inc.,
  422 S.W.3d 46 (Tex. App.—Austin 2013, no pet.) ................................................passim

Leordeanu v. Am. Protection Ins. Co.,
   330 S.W.3d 239 (Tex. 2010) ....................................................................................... 21-22

TGS-NOPEC Geophysical Co. v. Combs,
  340 S.W.3d 432 (Tex. 2011) .............................................................................................13

Titan Transp. v. Combs,
    433 S.W.3d 625 (Tex. App.—Austin 2014, pet. denied) ........................................ 2, 23

Traxler v. Entergy Gulf States, Inc.,
   376 S.W.3d 742 (Tex. 2012) .............................................................................................11

Upjohn Co. v. Rylander,
   38 S.W.3d 600 (Tex. App.—Austin 2000, pet. denied) ...............................................11

Statutes 

TEX. TAX CODE § 111.008(a) .................................................................................................. 9

TEX. TAX CODE § 112.052(d) .................................................................................................. 9

TEX. TAX CODE § 171.1011(g)(3) .........................................................................................24

TEX. TAX CODE § 171.1012(3)(B) ........................................................................................14

TEX. TAX CODE § 171.1012(3)(B)(ii)................................................................................... 14

TEX. TAX CODE § 171.1012(a)(1)............................................................................... 3, 11, 14



                                                              iii
TEX. TAX CODE § 171.1012(a)(3)(A)(i) ................................................................................11

TEX. TAX CODE § 171.1012(a)(3)(A)(i)-(iii)........................................................................... 3

TEX. TAX CODE § 171.1012(a)(3)(A)(ii) ............................................................. 11-12, 15-17

TEX. TAX CODE § 171.1012(a)(3)(A)(iii) ..............................................................................11

TEX. TAX CODE § 171.1012(a)(3)(B) ...................................................................................... 3

TEX. TAX CODE § 171.1012(b) ................................................................................................ 4

TEX. TAX CODE § 171.1012(c) ................................................................................................ 6

TEX. TAX CODE § 171.1012(c)-(f)........................................................................................... 4

TEX. TAX CODE § 171.1012(c)(1)-(3) ...................................................................................22

TEX. TAX CODE § 171.1012(c)(7)..........................................................................................22

TEX. TAX CODE § 171.1012(c)(10) ............................................................................ 6, 21-22

TEX. TAX CODE § 171.1012(f).......................................................................................... 8, 20

TEX. TAX CODE § 171.1012(i) .........................................................................................passim

Other Authorities 

IAGC, Current Member Certificates (June 30, 2015) ...............................................................13

HOUSE RESEARCH ORG.,
     Bill Analysis, Tex. H.B. 3, 79th Leg., 3d C.S. (2006) ........................................ 14-15

TGS-NOPEC (No. 08-1056) 2009 WL 899738,
     Amicus Curiae Br. of Int’l Ass’n of Geophysical Contractors in
     Supp. of Pet. for Review .............................................................................................13




                                                             iv
                                No. 03-14-00713-CV

                      In the Court of Appeals
                   for the Third Judicial District
                           Austin, Texas

GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS, AND
        KEN PAXTON, ATTORNEY GENERAL OF THE STATE OF TEXAS,
                                         Appellants,
                                           v.
                        CGG VERITAS SERVICES (U.S.), INC.,
                                                Appellee.

                                On Appeal from the
                353rd Judicial District Court of Travis County, Texas

                            APPELLANTS’ REPLY BRIEF


TO THE HONORABLE THIRD COURT OF APPEALS:

      Because CGG does not produce goods, its only costs that could qualify for the

cost-of-goods-sold (COGS) deduction are costs for labor or materials that CGG

furnishes to a project for the construction, maintenance, or improvement of real

property. But CGG has no eligible labor or materials costs because its only involvement

in such projects is providing seismic information that helps CGG’s clients decide where

or whether to drill for oil. And CGG’s efforts to shoehorn its costs into the “labor or

materials” provision rest on a misinterpretation of Tax Code section 171.1012. The

Court should reverse the judgment below.
                                       ARGUMENT

I.     CGG MISFRAMES THE INQUIRY.

       A.     This Appeal Involves Statutory Construction, a Question of Law.

       CGG suggests that the Comptroller’s appeal is hampered by his acceptance of

certain factual findings made below. See CGG Br. 19, 23-24. But this case is not about

the “‘credibility of the witnesses and weight to be given to their testimony.’” Id. at 24

(quoting Combs v. Newpark Res., Inc., 422 S.W.3d 46, 49 (Tex. App.—Austin 2013, no

pet.)). The Comptroller generally did not dispute CGG’s factual description of its

business at trial; accordingly, he has not challenged on appeal the findings embodying

that description. Instead, what is at issue is the construction of section 171.1012 and

its application to CGG’s business. See Titan Transp., LP v. Combs, 433 S.W.3d 625, 632

(Tex. App.—Austin 2014, pet. denied) (“The principal areas of conflict concern[ ] the

correct interpretation of the applicable statutory provisions and the proper

characterization of Titan’s business activities given the undisputed evidence.”).

       Issues of statutory construction and application present questions of law that are

reviewed de novo. Id. at 636. The trial court’s legal conclusions merit no deference,

regardless how they are labeled. See id. Accordingly, CGG cannot derail this appeal by

pointing to factual findings that are immaterial to the legal issues under a correct

construction or application of the law. See, e.g., id. at 642 (declaring findings immaterial

in light of Court’s construction and application of franchise-tax statute).




                                             2
      B.     Section 171.1012 Determines Whether an Entity’s Costs Qualify for
             the Cost of Goods Sold Deduction.

      CGG argues that, as a “deemed owner,” it may take any COGS deductions that

are available to actual owners of goods. CGG Br. 30-31, 36-37. But section 171.1012

does not establish a “threshold inquiry” regarding taxpayer status. Specifically, it does

not allow entities that furnish qualifying labor or materials under subsection (i) to

deduct costs other than the cost of furnishing that labor or those materials.

             1.     CGG’s “threshold inquiry” contradicts the statute.

      CGG argues that “[t]he only question before this Court is the threshold issue of

whether CGG qualified for the COGS deduction.” CGG Br. 64; see id. at 28 (describing

“[t]he threshold inquiry”). It calls the Comptroller’s focus on the deductibility of costs

“convoluted” and “inverted.” Id. at 19, 28. CGG is wrong, and its “threshold”

argument is simply a creative attempt to deduct ineligible costs.

      The statute starts by defining “goods” as “real or tangible personal property sold

in the ordinary course of business of a taxable entity.”              TEX. TAX CODE

§ 171.1012(a)(1). “Tangible personal property” is defined three ways—two of which

are irrelevant here. Id. § 171.1012(a)(3)(A)(i)-(iii). “Tangible personal property” is

further defined to exclude “intangible property” and “services.” Id. § 171.1012(a)(3)(B).

      Subsection (b) provides: “Subject to Section 171.1014, a taxable entity that elects

to subtract cost of goods sold for the purpose of computing its taxable margin shall

determine the amount of that cost of goods sold as provided by this section.” Id.



                                            3
§ 171.1012(b). Subsection (c) provides various categories of “direct costs of acquiring

or producing the goods”; subsection (d) lists additional costs that are eligible for the

COGS deduction; subsection (e) excludes certain cost categories; and subsection (f)

allows the deduction of “indirect or administrative overhead costs . . . allocable to the

acquisition or production of goods,” up to “four percent of the taxable entity’s total

indirect or administrative overhead costs.”          Id. §§ 171.1012(c)-(f).   All of these

provisions address the COGS eligibility of particular cost categories; they do not

establish a “threshold” eligibility test for entities.

              2.      Section 171.1012(i)’s “labor or materials” provision does not
                      allow a deemed owner of labor or materials to take a COGS
                      deduction for costs other than the costs of furnishing “that
                      labor or materials.”

       Subsection (i) is the focus of the parties’ disagreement. Its first sentence states

that “[a] taxable entity may make a subtraction under this section in relation to the cost

of goods sold only if that entity owns the goods.” Id. § 171.1012(i). CGG argues that

subsection (i)’s ownership requirement “qualifies” certain entities to take COGS

deductions under subsections (c), (d), and (f). CGG Br. 28, 30, 36. Not so.

       Contrary to CGG’s claim, the ownership requirement limits which entities can

claim the COGS deductions authorized under subsections (c), (d), and (f). See Newpark

Res., 422 S.W.3d at 55 (stating that ownership requirement “operates as a broad

limitation on which entities can claim the cost-of-goods-sold deduction, restricting it to




                                               4
those that actually own the goods they sell”). Instead, the ownership requirement

makes COGS deductions unavailable to entities that do not own the goods produced.

      The third sentence of subsection (i) creates a narrow exception to the ownership

requirement: “A taxable entity furnishing labor or materials to a project for the

construction, improvement, remodeling, repair, or industrial maintenance . . . of real

property is considered to be an owner of that labor or materials and may include the

costs, as allowed by this section, in the computation of cost of goods sold.” TEX. TAX

CODE § 171.1012(i). CGG reads the “labor or materials” provision as treating a

qualifying entity as a “‘deemed owner’ of goods.” CGG Br. 28 (emphasis added). This

counter-textual leap, which rewrites the core of the “labor or materials” provision, is

the cornerstone of CGG’s flawed argument.

      Under the “labor or materials” provision’s plain language, an entity furnishing

labor or materials to a qualifying project “is considered to be an owner of that labor or

materials,” TEX. TAX CODE § 171.1012(i) (emphasis added). CGG cannot avoid the

distinction simply by labeling itself a “deemed owner” and ignoring what it is that CGG

is purportedly deemed to own.

      CGG admits that its interpretation would allow a taxpayer to claim deductions

for costs that it could not deduct under subsections (c), (d), or (f). For example, CGG

concedes that it does not “qualif[y] for the COGS deduction on the basis of subsection

(c)(10),” CGG Br. 36, the subsection that authorizes COGS deductions for “geological

and geophysical costs incurred to identify and locate property that has the potential to

                                           5
produce minerals,” TEX. TAX CODE § 171.1012(c)(10). But CGG claims that, as a

“deemed owner under subsection (i),” it is nonetheless “entitled to deduct all of its

incurred costs as allowed by subsections (c), (d), and (f), including the costs specified

under (c)(10).” CGG Br. 36-37. CGG’s reading cannot be reconciled with the statute.

       By authorizing a deemed owner of labor or materials to “include the costs . . . in

the computation of cost of goods sold,” the “labor or materials” provision allows a

deduction only for the costs incurred in furnishing “that labor or materials.” TEX. TAX

CODE § 171.1012(i) (emphasis added). It does not allow a deemed owner of labor or

materials to deduct costs unrelated to that labor or those materials. See Newpark Res.,

422 S.W.3d at 56 (stating that “section 171.1012(i) is designed to allow the party that

furnishes labor for the improvement of real property to deduct that cost as if it sold the

property”) (emphasis added). Only by rewriting the statute can CGG argue that an

entity that neither owns nor produces goods may nonetheless deduct all of its costs

under subsections (c), (d), and (f).

              3.     Newpark Resources supports the Comptroller’s construction.

       In Newpark, the Court described the relevant inquiry as whether “those entities

that furnish labor to the improvement of real property [may] deduct all expenses related

to their supply of labor as a cost of goods sold.” 422 S.W.3d at 55 (emphasis added); see

also id. at 51 (stating issue presented as whether the taxpayer “‘furnish[ed] labor or

materials to a project for the construction . . . of real property’ such that it can include

the cost of that labor or material in its cost of goods sold”) (quoting TEX. TAX CODE

                                             6
§ 171.1012(i)). The Court agreed that subsection (i)’s purpose is to allow construction

companies and contractors to deduct the costs of materials and labor they furnish to a

construction project when their non-ownership of the real property would otherwise

render those costs ineligible. Id. Accordingly, it “conclude[d] that when viewed in the

context of section 171.1012, subsection (i) means that the party that supplies labor or

materials to the construction, improvement, remodeling, repair, or industrial

maintenance of real property can deduct its labor or material expenses as a cost of goods

sold, assuming those expenses would qualify as the cost of selling real property.” Id. at

55-56 (emphasis added).

       Nothing in the opinion suggests that being deemed to own labor or materials lets

an entity deduct costs other than the costs incurred in furnishing that labor or those

materials. Instead, the Court’s conclusion that a deemed owner of labor or materials

“can deduct its labor or material expenses as a cost of goods sold” under subsection (i),

id. at 56, implicitly recognizes that the “labor or materials” exception is limited to costs

associated with furnishing that labor or those materials.

              4.     Estoppel is not a valid method of statutory construction.

       CGG urges that the Comptroller is effectively estopped from arguing that the

“labor or materials” provision allows a deemed owner to deduct only its qualifying labor

or materials costs on the theory that, at trial, “[t]he Comptroller’s auditor, Gary Dullum,

agreed that ‘as allowed by this section’ means all of the costs under (c), (d), and (f).”

CGG Br. 66 (citing 3.RR.72-73). CGG is wrong in two respects.

                                             7
       First, the record belies CGG’s assertion.              Mr. Dullum agreed “that

subsections . . . (c) and (d) provide for the inclusion in cost of goods sold, the categories

of costs that are stated under those subsections as direct costs.” 3.RR.72:20-25; see also

3.RR.73:14-17. He further testified that section 171.1012(f) and Rule 3.588 govern the

deductibility of indirect costs. 3.RR.73:1-13. But he did not testify that the phrase “as

allowed by this section” authorizes a deemed owner of labor or materials to deduct

costs other than for furnishing that labor or those materials.

       Even if he had so testified, Mr. Dullum’s opinion regarding the interpretation of

section 171.1012 would be irrelevant because “[m]atters of statutory construction are

questions of law for the court to decide.” Upjohn Co. v. Rylander, 38 S.W.3d 600, 611

(Tex. App.—Austin 2000, pet. denied) (upholding exclusion of expert testimony

regarding correct interpretation of franchise-tax provision); see also Traxler v. Entergy Gulf

States, Inc., 376 S.W.3d 742, 747 (Tex. 2012) (“Regardless of the expert testimony

[regarding the meaning of statutory terms], the issue before us is one of statutory

construction for the courts.”). CGG’s reliance on a 2009 letter written by a Comptroller

employee, see CGG Br. 66, is similarly unavailing.

       C.     It Was CGG’s Burden to Prove the Eligibility of Its Claimed Costs.

       As discussed below, even if some of CGG’s costs were deductible as qualifying

labor or materials costs, that would not allow CGG to deduct other costs that do not

qualify for a COGS deduction under subsections (c), (d), or (f). See infra Part III.

Similarly, even if CGG could qualify as an actual owner of goods with respect to its

                                              8
images licensed through its Multi-Client Data Library (MCDL), that would not let CGG

deduct costs related to its proprietary seismic data, which is not a “good.” Compare

CGG Br. 31 (erroneously arguing that “qualify[ing] as an ‘actual owner of goods’ based

on its MCDL business activity . . . provides an alternative basis for affirming the final

judgment in full”) (emphasis added), with id. at 60 n.14 (“CGG has never argued that it

qualifies as an ‘actual owner’ of goods based on its proprietary sales.”); see also infra Part

II.

       In an effort to avoid these problems (and deduct millions of dollars in ineligible

costs), CGG argues that the Comptroller waived any argument that CGG failed to

segregate its eligible costs from its ineligible costs. CGG Br. 63-64. CGG’s waiver

argument is both legally erroneous and factually flawed.

       As the plaintiff in a tax-protest suit under section 112.052, CR.5, CGG had the

burden to provide all of the documentation necessary to support its claim. See TEX.

TAX CODE § 112.052(d) (“A taxpayer shall produce contemporaneous records and

supporting documentation appropriate to the tax or fee for the transactions in question

to substantiate and enable verification of a taxpayer’s claim relating to the amount of

the tax, penalty, or interest that has been assessed or collected or will be refunded, as

required by Section 111.0041.”); id. § 111.008(a) (authorizing Comptroller to “compute

and determine the amount of tax to be paid from information contained in the report

or from any other information available to the comptroller”); Alon USA, LP v. State,

222 S.W.3d 19, 34 (Tex. App.—Austin 2005, pet. denied) (“Where the tax cannot be

                                              9
determined with reasonable mathematical certainty from the available records, and the

taxing authority declares the tax due from all information available that it deems

reasonable, the burden to show that the determination was unreasonable, excessive, or

that it was reached capriciously or arbitrarily, shifts to the complainant.”); Bullock v. Foley

Bros. Dry Goods Corp., 802 S.W.2d 835, 839 (Tex. App.—Austin 1991, writ denied)

(“[T]he Comptroller’s deficiency determination is prima facie correct, and the taxpayer

must disprove it. And, without a requirement that a taxpayer disprove an audit by

documentation, the regulatory scheme requiring taxpayers to keep books and records

would be vitiated.” (internal citation omitted)).

       At no point did the Comptroller relieve CGG of its burden to document its

claimed COGS deductions.          At trial, the Comptroller’s counsel complained, for

example, that CGG “does not keep track of which of its costs are for acquiring raw

data,” CR.47, “does not keep track of which of its costs are for processing data into

visual representations,” CR.48, and “does not keep track of which costs of acquisition

and production are for contract customers and which are for multi-client customers,”

id. CGG subsequently introduced two exhibits separating its proprietary seismic data

from its Multi-Client Data Library (MCDL) costs, with the proprietary costs further

separated into data-acquisition costs and data-processing costs. 4.RR.708-10 (Pls.’ Exs.

48-49). Referencing the segregated costs shown in Exhibit 48, the Comptroller argued

that seismic data provided to proprietary customers, which represented more than half

of CGG’s sales, could not be intended for mass distribution, even if CGG’s MCDL

                                              10
data arguably could be. 3.RR.149-50. CGG’s argument that the Comptroller waived

CGG’s failure to segregate its ineligible costs from potentially eligible costs is meritless.

       CGG is also wrong in claiming that, “[a]t trial, the Comptroller challenged only

whether CGG qualified for the COGS deduction under Section 171.1012(i).” CGG

Br. 15. CGG ignores the arguments that CGG’s costs are not deductible under

subsections (c), (d), or (f) because CGG sells services and intangible property, not

goods, and fails the mass-distribution and substantially-unaltered requirements under

section 171.1012(a)(3)(A)(ii). CR.58-60, 62-65. The Comptroller accepted CGG’s cost

calculations but contested the COGS eligibility of CGG’s deductions. 2.RR.16:1-2.

II.    CGG’S SEISMIC-DATA COSTS ARE NOT ELIGIBLE                        FOR THE      COGS
       DEDUCTION BECAUSE CGG PRODUCES NO “GOODS.”

       It is undisputed that CGG’s seismic data is not real property, see TEX. TAX CODE

§ 171.1012(a)(1); personal property, id. § 171.1012(a)(3)(A)(i); or a computer program,

id. § 171.1012(a)(3)(A)(iii). CGG’s sole basis for claiming to sell “goods” is its argument

that seismic data falls within the provision defining tangible personal property to include

       films, sound recordings, videotapes, live and prerecorded television and
       radio programs, books, and other similar property embodying words,
       ideas, concepts, images, or sound, without regard to the means or methods
       of distribution or the medium in which the property is embodied, for
       which, as costs are incurred in producing the property, it is intended or is
       reasonably likely that any medium in which the property is embodied will
       be mass-distributed by the creator or any one or more third parties in a
       form that is not substantially altered.

Id. § 171.1012(a)(3)(A)(ii).




                                             11
      This provision cannot support the trial court’s judgment for several reasons.

First, CGG does not produce goods; it provides a service in the form of data, which is

intangible property. See Comptroller Br. 28-35. Second, CGG does not intend to mass-

distribute its seismic data in any medium in which it is embodied, much less in a

substantially unaltered form.     Id. at 36-41.   Moreover, CGG presses its “mass-

distribution” argument solely with respect to MCDL costs, yet CGG’s own evidence

reveals that allowing a COGS deduction for those costs alone would not entitle CGG

to a tax refund. Id. at 37. Finally, CGG Veritas’s flawed interpretation of “similar

property” ignores well-established principles of statutory interpretation. Id. at 39.

      A.     CGG Provides a Service; It Does Not Sell Tangible Property.

      Acknowledging how technology has altered society’s consumption of goods, the

Legislature expanded the definition of “tangible personal property” to include property

such as films, books, and music that is essentially the same good regardless whether it

is embodied in a digital or traditional medium, so that an entity would be able to deduct

certain costs accrued in creating those goods regardless of the production medium.

Thus, the “tangible personal property” definition encompasses property that ordinarily

would not be considered “tangible.” See CGG Br. 53 (discussing “artificial TPP”). But

the Legislature limited the expansion to the items listed and “similar property,” and it

imposed requirements of mass-distribution and substantially-unaltered form. TEX. TAX

CODE § 171.1012(a)(3)(A)(ii).




                                           12
                  1.     CGG’s seismic data is intangible property.

          It is undisputed that CGG’s seismic data is an intangible asset. See TGS-NOPEC

Geophysical Co. v. Combs, 340 S.W.3d 432, 441 (Tex. 2011); CGG Br. 53. CGG lists

seismic data as intangible assets in its internal documents. 5.RR.187, 226. And the

International Association of Geophysical Contractors (of which CGG is a core

member)1 submitted an amicus brief characterizing seismic data as “a specific type of

intangible property” in the TGS-NOPEC case. See Amicus Curiae Br. of Int’l Ass’n of

Geophysical Contractors in Supp. of Pet. for Review at 11, TGS-NOPEC (No. 08-

1056), 2009 WL 899738, at *11.2 Because seismic data is an intangible asset that cannot

fit within the narrow statutory expansion of “tangible personal property,” it is not a

“good” for COGS purposes. See TEX. TAX CODE §§ 171.1012(a)(1), .1012(a)(3)(B).

                  2.     CGG uses its seismic data to provide its clients with seismic
                         maps representing CGG’s opinion regarding the
                         underground topography.

          CGG avoids characterizing its work as performing services in its brief, but its

description of its business (including the company name) belie its efforts. See, e.g., CGG

Br. 1 (“CGG Veritas Services (U.S.), Inc.”); CR.7 (explaining that CGG “perform[s]

geophysical data acquisition services” for oil and gas producers); 5.RR.72 (“We are

committed to providing clients with a full array of seismic data services, from


1
  See IAGC, Member Company Certificates (June 30, 2015), http://www.iagc.org/member-company-
certificates.html (follow hyperlink to Members) (last visited Aug. 24, 2015).
2
    Available at http://www.search.txcourts.gov (search case # 08-1056, then follow hyperlink).


                                                   13
acquisition and processing to data interpretation and management.”). CGG’s lead

witness at trial even described CGG’s acquisition of seismic data as a service.

2.RR.104:9-13. CGG cannot include the costs of its services in a COGS deduction

because the statutory definition of tangible personal property explicitly excludes

“services.” See TEX. TAX CODE § 171.1012(3)(B)(ii).

       The legislative history further supports this conclusion. Franchise tax supporters

contemplated that service providers would deduct employee compensation rather than

COGS. See HOUSE RESEARCH ORG., Bill Analysis at 11, Tex. H.B. 3, 79th Leg., 3d C.S.

(2006) (“While a manufacturing firm that produces goods for sale likely would choose

to deduct the costs associated with producing those goods, a service-based business

would be able to deduct its primary expense, which is employee wages.”). Opponents

likewise recognized that service providers could not take a COGS deduction for most

expenses and would essentially “be left with no choice other than the compensation

deduction.” Id. at 14.3

       Moreover, CGG is wrong to suggest that because its services of data acquisition

and interpretation can be captured in “visual and sound recordings,” the resulting

seismic data falls within the narrow statutory expansion of tangible personal property.



3
  The service-sector business example provided was a law firm. Similar to how CGG sells the
acquisition, processing, and interpretation of intangible seismic data services, law firms sell legal
researching, writing, and interpretation services. While both seismic data or legal advice can be
inscribed on paper or other tangible medium, the act of recording the intangible information and
advice into tangible form does not transform the costs incurred in providing those services into costs
incurred in producing “tangible personal property” that is eligible for a COGS deduction.

                                                 14
See CGG Br. 58. The statutory phrase “without regard to the means or methods of

distribution or the medium in which the property is embodied” makes clear that the

mode of distribution and embodiment is irrelevant.                    TEX. TAX CODE

§ 171.1012(a)(3)(A)(ii). Whether property falls within this provision hinges on its

essence (and whether it is mass-distributed and substantially unaltered), not on its ability

to be embodied in a visual image or sound recording. Cf. CGG Br. 4. The essence of

seismic data is information, similar to an X-ray or MRI that a doctor interprets to inform

a patient what is occurring under the skin.

       The nature of seismic or medical information does not change simply because it

is recorded or transcribed into a corporeal form. As with medical test results, CGG’s

seismic images have value only to the extent they reflect the professional opinion of

CGG’s geoscientists. See 2.RR.48:19-22 (noting that the same sound recording can lead

to numerous different images, “because each of the different algorithms [applied during

processing] . . . will give you a different image”). Accordingly, what oil companies are

really buying are services reflecting CGG’s professional opinion, which is expressed as

a visual image or model. Because CGG sells services and intangible property, not goods

(like films or books) that are sought for their aesthetic or narrative value, CGG’s costs

are not deductible for COGS purposes.




                                              15
       B.     CGG’s Concessions Make It Unnecessary for the Court to Address
              the Parties’ Arguments Regarding Section 171.1012(a)(3)(A)(ii).

       CGG’s seismic data also fails to meet the mass-distribution requirement to fit

within the statutory definition of “tangible personal property.” To be considered

‘tangible personal property” (regardless of whether the medium of distribution is

actually tangible), for “costs are incurred in producing the property,” it must be

“intended or [] reasonably likely that any medium in which the property is embodied

will be mass-distributed . . . .” TEX. TAX CODE § 171.1012(a)(3)(A)(ii). As previously

discussed, none of CGG’s seismic data are intended or reasonably likely to be mass-

distributed in any medium. See Comptroller Br. 35-41. But CGG’s concessions obviate

the need for the Court to address this issue.

       CGG argues only that its MCDL data satisfies the mass-distribution requirement.

See CGG Br. 59-62. CGG does not press that argument with respect to its proprietary

seismic data, see id. at 60 n.14, which is acquired and processed for an individual client’s

exclusive use—the antithesis of mass distribution. See Comptroller Br. 36-37. CGG’s

implicit concession that its proprietary data fails the mass-distribution prong is crucial

because, if CGG’s proprietary-data costs are ineligible for the COGS deduction, CGG

is not entitled to any tax refund. See 4.RR.710 (Pls.’ Ex. 49, Scenario 2).4 Even if CGG

could meet the mass-distribution prong with respect to its MCDL costs, that would


4
 If only the MCDL data satisfy the mass-distribution requirement, the 30% franchise-tax deduction
would be more favorable to CGG than the COGS deduction. 4.RR.710 (Pls.’ Ex. 49) (Scenario 3).


                                               16
help CGG only if it could also establish mass distribution with respect to its proprietary

data costs—an argument that CGG understandably declines to advance. See, e.g., CGG

Br. 50 (“Through its MCDL, CGG sells goods in the ordinary course of business.”

(emphasis added)).

       For the same reason, the Court need not decide whether CGG substantially alters

the raw seismic data by transforming it into useful visual images, see Comptroller Br.

40-41, or whether raw seismic data is similar to films, sound recordings, videotapes,

television and radio programs, and books, all of which—unlike CGG’s raw seismic

data—have narrative, aesthetic, or artistic value. See id. at 39-40. Unless CGG has at

least $87,493,071 in non-MCDL costs that are eligible for a COGS deduction under

subsection (i)’s “labor or materials” provision or some other provision of section

171.1012, CGG’s concessions that it (1) cannot satisfy the mass-distribution prong with

respect to its proprietary data and (2) is not entitled to a tax refund if it can deduct only

its MCDL costs means that the final judgment awarding CGG a COGS deduction of

$567,600,223 cannot be sustained under section 171.1012(a)(3)(A)(ii). See infra Part III.

III.   CGG IS NOT A DEEMED OWNER OF GOODS UNDER SECTION 171.1012(i)
       AND CANNOT QUALIFY FOR THAT SECTION’S NARROW “LABOR OR
       MATERIALS” EXCEPTION.

       Acquiring raw seismic data and transforming it into useful visual images

undoubtedly require significant effort, technology, and expertise—and, accordingly,

significant costs. See CGG Br. 1-5. But CGG’s efforts to shoehorn its costs into the

narrow “labor or materials” exception fail for two principal reasons.

                                             17
      First, when CGG provides its clients with sophisticated seismic images that help

those companies decide where or whether to drill, it is providing a professional service,

not furnishing labor or materials. Although “labor” and “services” are not mutually

exclusive terms, classifying CGG’s highly-specialized professional services as mere

“labor” would obliterate any meaningful difference between those terms.

      Second, any labor or materials provided by CGG are not furnished “to a project

for the construction, improvement, remodeling, repair, or industrial maintenance” of

real property. Here, the construction or improvement projects are oil and gas wells that

may (or may not) eventually be drilled. Those drilling decisions may be based on CGG’s

opinion about where hydrocarbons are likely to be found, but CGG has no involvement

in the actual construction of the well. At most, CGG’s efforts are furnished in

anticipation of construction projects that may later arise.

      A.     CGG’s Provision of Sophisticated Data-Processing Services Is Not
             “Furnishing Labor or Materials.”

             1.     CGG is not furnishing “labor.”

      CGG’s acquisition and transformation of seismic data constitutes a service. See

supra Part II.A. In Newpark, this Court recognized that the definitions of “labor” and

“services,” while overlapping to some extent, “encompass different concepts.” 422

S.W.3d at 54. Simply because a service involves some expenditure of effort does not

mean that every cost involved in providing that service can be deducted under the

“labor or materials” provision.



                                           18
       When a professional provides a service, the value to the client lies in the

professional’s expertise, which is acquired through years of specialized study that go far

beyond the training that even a skilled laborer typically undergoes. Processing seismic

data requires a “complex . . . software and hardware system” staffed by “a lot of highly

trained and experienced people.” 2.RR.90:9-11. CGG’s data-processing center in

Houston is staffed by approximately 200 geoscientists, over 75% of whom hold

doctorates or other advanced degrees. 2.RR.90:13-19. “Generating seismic images is

‘a lot of science and somewhat of an art.’” CGG Br. 4 (quoting 2.RR.141:15-16). CGG

cannot simply “dump [the raw data] in and turn a crank.” 2.RR.90:21-22.

       By contrast, when labor is furnished for a construction project, such as framing,

roofing, or waste-removal work, the effort is the dominant component. 422 S.W.3d at

56-57 (concluding that hauling and disposing of drilling mud and waste materials from

drilling site is “labor” that falls within the “labor or materials” provision). Nor do waste

disposal and other construction-related labor require advanced scientific degrees.

CGG’s conclusory argument that “CGG’s activity qualifies as labor just as [Newpark’s]

did,” CGG Br. 41, is unpersuasive.

       The Court recognized in Newpark that the “labor or materials” exception was

intended to allow construction companies and contractors to deduct their material and

labor costs that otherwise would be ineligible because the finished project is owned by

others. 422 S.W.3d at 55 (“Given that real property itself is a ‘good’ within the meaning

of section 171.1012, but that many of the businesses that incur costs to improve or

                                            19
maintain real property never sell that good, the legislature could have reasonably

intended section 171.1012(i) to allow those same companies to deduct their costs as if

they were a cost of goods sold.”). But CGG does not furnish labor or materials to

construction projects in the way that builders and subcontractors do.

      If CGG’s costs qualify as “labor” costs, it is hard to imagine any service-related

costs that would not. The services provided by lawyers, doctors, architects, engineers,

and countless other professionals all involve some expenditure of mental or physical

effort. See id. at 54 n.8 (suggesting that labor involves “an additional expenditure of

either physical or mental effort” beyond that required to perform services). One would

not expect that the cost of legal services provided in connection with the acquisition of

a mineral lease could be deducted as “labor or materials” furnished to the construction

of a well on that lease. Yet CGG’s position embraces that absurd result.

      CGG observes that the costs of legal, accounting, security, and other services are

deductible as indirect or administrative overhead costs under subsection (f). See CGG

Br. 40. But that hardly “show[s] the Legislature’s intent that aspects of ‘service’ can be

provided as part of ‘furnishing labor or materials.’” Id. Whereas all of a taxpayer’s

qualifying labor or materials costs are eligible for a COGS deduction under subsections

(c) or (i), only 4% of the taxpayer’s total indirect or administrative overhead costs may

be deducted under subsection (f). TEX. TAX CODE § 171.1012(f). Subsection (f)’s

drastic limitation on the amount of service-related costs that are deductible, together



                                           20
with the exclusion of services from the TPP definition, confirms that the Legislature

did not intend to allow large COGS deductions for service-related costs.

      CGG argues that the Comptroller’s distinction between professional services and

labor is “the same argument” as the “physical change” requirement that the

Comptroller abandoned last year after the Titan Transportation decision. CGG Br. 42-

43. That argument is meritless. The Comptroller is not arguing that CGG’s costs are

ineligible per se in the absence of physical changes; his appellant’s brief does not even

address the subject. CGG is attacking a straw man.

             2.     The cost of CGG’s seismic services can be deducted by
                    drilling companies but not CGG.

      The Court need not decide the precise parameters of the definitions of “labor”

and “services” in order to recognize that CGG’s costs are not “labor or materials” costs.

As previously discussed, the separate statutory category allowing a COGS deduction

for “geological and geophysical costs incurred to identify and locate property that has

the potential to produce minerals,” TEX. TAX CODE § 171.1012(c)(10), indicates that

the Legislature did not consider geological mapping services to constitute “labor” or

“materials,” categories that are covered in their own statutory subsections, id.

§ 171.1012(c)(1)-(3). See Comptroller Br. 45-47. CGG’s position that its seismic-data

costs are all deductible under the “labor or materials” provision, see CGG Br. 31-36,

renders subsection (c)(10) mere surplusage. See Leordeanu v. Am. Protection Ins. Co., 330




                                           21
S.W.3d 239, 248 n.35 (Tex. 2010) (“We construe statutes to give effect to every

provision and ensure that no provision is rendered meaningless or superfluous.”).

      CGG points to “intangible drilling and dry hole costs,” which are allowed under

section 171.1012(c)(7), arguing that those costs overlap with “geological and

geophysical costs incurred to identify and locate property that has the potential to

produce minerals,” which are deductible under section 171.1012(c)(10). See CGG Br.

39. But just because a drilling company is likely to incur costs in both categories does

not mean that either category subsumes the other. The former provision authorizes

COGS deductions for “the cost of renting or leasing equipment, facilities, or real

property directly used for the production of the goods.” TEX. TAX CODE

§ 171.1012(c)(7). Drilling companies can deduct the costs of purchasing mineral leases

and renting drilling equipment under that provision because those companies produce

goods—oil and gas. They can deduct the cost of seismic services (like CGG’s) under

subsection (c)(10) for the same reason. But the Legislature did not intend for CGG

(and other companies that produce no goods) to claim COGS deductions for the cost

of providing those services.

      B.     CGG’s Seismic Data Is Not Furnished to a Construction Project.

      CGG’s reliance on the “labor or materials” provision separately fails because

CGG’s services are “too far removed from the construction, improvement, remodeling,

repair, or industrial maintenance of real property to qualify for the [COGS] deduction

under section 171.1012(i).” Newpark, 422 S.W.3d at 57. Although an oil and gas well

                                          22
constitutes a real-property construction “project,” that project is merely a potential

project until construction of the well actually begins. That may happen months or years

after CGG provides the client with seismic data (or never, if the client decides to drill

elsewhere). In every instance, no construction project actually exists when CGG

furnishes whatever “labor” or “materials” are reflected in its seismic data—which

undercuts CGG’s argument that it furnishes labor or materials “to” a construction,

improvement, or maintenance project. CGG’s attempts to circumvent this problem

are unavailing.

       First, CGG reads “furnishing . . . to a project” to require only that the labor or

materials be “sufficiently connected to a real-property improvement project.” CGG

Br. 31; see also id. at 45. But the Legislature’s purpose in using the “to a project” language

was to constrain the “labor or materials” exception to labor or materials directly used

in projects to build, improve, or maintain real property. If the Legislature had intended

only the modest nexus that CGG urges, it would have used language such as “in

connection with a project,” as it did in a neighboring provision governing calculation

of a taxpayer’s total revenue for franchise-tax purposes.            See TEX. TAX CODE

§ 171.1011(g)(3) (allowing taxpayer to exclude from total revenue payments for labor

or materials “in connection with the actual or proposed design, construction,

remodeling, remediation, or repair of improvements on real property”); Titan Transp.,

433 S.W.3d at 637-38 (stating that “‘[i]n connection with’ is a phrase of intentional

breadth” that “can only be read as requiring some reasonable nexus between the

                                             23
services, labor, and materials for which the taxpayer pays a subcontractor and ‘the actual

or proposed design, construction, remodeling, or repair of improvements on real

property or the location of boundaries of real property’”) (quoting TEX. TAX CODE

§ 171.1011(g)(3)).

       Similarly, if the Legislature had wanted to authorize deductions for labor or

materials furnished in connection with potential projects, it would have used language

like the “actual or proposed” language used in section 171.1011(g)(3). Instead, the

Legislature required that the labor or materials be furnished “to a project.” TEX. TAX

CODE § 171.1012(i). CGG’s argument that requiring labor or materials to be furnished

to existing projects “reads words into the statute,” CGG Br. 47, ignores that the “labor

or materials” provision omits section 171.1011(g)(3)’s “actual or proposed” language.

       CGG also tries to circumvent the “to a project” language by subtly replacing the

statutory meaning of “project”—referring to, in this case, an oil and gas well—with the

broader sense of “project” that describes the exploration ventures undertaken by

CGG’s clients. See CGG Br. 48 (describing situations in which “the [proprietary]

customer is far enough into the project to specify the parameters of work for CGG”)

(emphasis added); id. at 49 (“Determining where to drill and not to drill are equally

essential components of the project”) (emphasis added); see also id. at 1 (“CGG Produces

and Sells Seismic Data for Use in Oil & Gas Projects.”); id. at 5 (“Seismic Data is

Essential to Drilling Projects.”); id. at 6 (“CGG’s work is ‘important to the entire drilling

project.’” (quoting 2.RR.130:20-21)). Simply because CGG’s services are useful to oil

                                             24
and gas ventures does not mean that CGG furnishes labor or materials to a project for

the construction or maintenance of an oil well.

      C.     CGG Cannot Legitimately Claim That All of Its Costs Are for
             “Labor or Materials.”

      CGG argues that if any of its costs qualify under the “labor or materials”

provision, then all of them do. CGG Br. 63-67. In CGG’s view, spending one dollar

on qualifying labor or materials would allow it to deduct millions of dollars in costs that

are not labor or materials costs and are otherwise ineligible under section 171.1012. See

id. Neither Texas law nor common sense supports CGG’s position. As discussed

above, subsection (i)’s “labor or materials” provision authorizes COGS deductions only

for costs of furnishing labor or materials. See supra Part I.B. And it was CGG’s burden

to document and prove all of its claimed deductions, not the Comptroller’s burden to

disprove them. See supra Part I.C.

                                         PRAYER

      The Court should reverse the judgment below and render judgment for the

Comptroller or remand for further proceedings.




                                            25
     Respectfully submitted.

     KEN PAXTON
     Attorney General of Texas

     CHARLES E. ROY
     First Assistant Attorney General

     SCOTT A. KELLER
     Solicitor General

     /S/_Joseph D. Hughes__
     JOSEPH D. HUGHES
     Assistant Solicitor General
     State Bar No. 24007410

     AUTUMN HAMIT PATTERSON
     Assistant Attorney General
     State Bar No. 24092947

     OFFICE OF THE ATTORNEY GENERAL
     P.O. Box 12548 (MC 059)
     Austin, Texas 78711-2548
     Tel.: (512) 936-1729
     Fax: (512) 474-2697
     jody.hughes@texasattorneygeneral.gov

     COUNSEL FOR APPELLANTS




26
                             CERTIFICATE OF SERVICE

      I hereby certify that on August 25, 2015, a true and correct copy of the foregoing

brief was served via File & ServeXpress to the following counsel of record:

      Amanda Taylor
      James F. Martens
      Lacy Leonard
      MARTENS TODD LEONARD & TAYLOR
      301 Congress Ave., Suite 1950
      Austin, Texas 78701
      Tel.: (512) 542-9898
      Fax: (512) 542-9899
      ataylor@textaxlaw.com
      jmartens@textaxlaw.com
      lleonard@textaxlaw.com


                                        /s/ Joseph D. Hughes
                                        Joseph D. Hughes




                           CERTIFICATE OF COMPLIANCE

      In compliance with Texas Rule of Appellate Procedure 9.4(i)(2), this brief

contains 6,235 words, excluding the portions of the brief exempted by Rule 9.4(i)(1).

                                        /s/ Joseph D. Hughes
                                        Joseph D. Hughes




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