      TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN


                                      NO. 03-14-00397-CV



 Appellant, American Multi-Cinema, Inc. // Cross-Appellants, Glenn Hegar, Comptroller
   of Public Accounts of the State of Texas; and Ken Paxton, Attorney General of the
                                      State of Texas

                                                 v.

    Appellees, Glenn Hegar, Comptroller of Public Accounts of the State of Texas; and
     Ken Paxton, Attorney General of the State of Texas // Cross-Appellee, American
                                 Multi-Cinema, Inc.


     FROM THE DISTRICT COURT OF TRAVIS COUNTY, 200TH JUDICIAL DISTRICT
      NO. D-1-GN-12-003831, HONORABLE ORLINDA NARANJO, JUDGE PRESIDING



                            MEMORANDUM OPINION


               Appellant cross-appellee American Multi-Cinema, Inc. (AMC) sued appellees

cross-appellants the Comptroller of Public Accounts and the Attorney General (collectively the

Comptroller)1 to recover franchise taxes paid under protest for report years 2008 and 2009. See Tex.

Tax Code §§ 112.051–.060, 171.001–.1012. The case was tried before the bench in two phases. The

Comptroller appeals the trial court’s ruling in phase one, and AMC appeals the trial court’s ruling

in phase two. For the reasons that follow, we affirm the trial court’s judgment in part and reverse

and render in part.


       1
          Glenn Hegar, in his official capacity as the Texas Comptroller of Public Accounts, is
substituted for Susan Combs, and Ken Paxton, in his official capacity as the Attorney General, is
substituted for Greg Abbott. See Tex. R. App. P. 7.2(a).
                                         BACKGROUND

               AMC is in the movie theater business, primarily exhibiting films and other content

to its customers. For tax report years 2008 and 2009, AMC determined its taxable margin for

purposes of calculating its Texas franchise tax by subtracting its cost of goods sold (COGS) from

its total revenue. See id. §§ 171.101 (allowing taxable entity to subtract cost of goods sold to

determine taxable margin for franchise tax calculation), .1012 (addressing how cost of goods sold

determined); see generally Combs v. Newpark Res., Inc., 422 S.W.3d 46, 47–8 (Tex. App.—Austin

2013, no pet.) (describing structure and formula for calculating franchise tax, which is “tax on the

value and privilege of doing business in Texas” (citing In re Nestle USA, Inc., 387 S.W.3d 610, 612

(Tex. 2012) (orig. proceeding))). AMC included its costs of exhibiting films and other content

(exhibition costs) as COGS for those years. See Tex. Tax Code § 171.1012(c) (including “all direct

costs of acquiring or producing the goods” as COGS). After an audit, the Comptroller disallowed

those costs, resulting in AMC’s owing additional franchise taxes. AMC paid the additional franchise

taxes under protest and brought this suit, asserting that its exhibition costs were properly included

in the COGS subtraction. See id. §§ 171.101, .1012.

               The parties agreed to a bifurcated bench trial. In phase one, the trial court considered

whether AMC was entitled to include its exhibition costs in its COGS subtraction.                  See

id. § 171.1012. The parties disputed whether AMC’s product amounts to a “good” as that term is

defined in section 171.1012(a) of the Tax Code. See id. § 171.1012(a). “‘Goods’ means real

or tangible personal property sold in the ordinary course of business of a taxable entity.” Id.

§ 171.1012(a)(1). Among other definitions, the statute defines “tangible personal property” to mean:



                                                  2
       (i)      personal property that can be seen, weighed, measured, felt, or touched or that is
                perceptible to the senses in any other manner;

       (ii)     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)(i), (ii).2 “‘Tangible personal property’ does not include: (i) intangible

property; or (ii) services.” Id. § 171.1012(a)(3)(B).

                To support its position that its product falls within the definition of “goods” in section

171.1012, AMC called two of its vice presidents who testified about AMC’s business, its film

product, and AMC’s “production steps” from the time it receives a film from a movie studio to

exhibiting the film. To support his position that AMC’s product does not constitute “goods,” the

Comptroller called an entertainment lawyer who testified about the film industry, the types of

businesses within that industry—film producers, distribution companies, and film exhibitors—and

the meaning of terms in the industry such as “film production” and “film distribution.” According

to the Comptroller’s witness, AMC is not a film producer or distributor, but a “film exhibition

company,” and AMC’s customers do not purchase goods but “the right to observe the movie in

the theater.”




       2
         The statute also defines “tangible personal property” as “a computer program, as defined
by Section 151.0031.” Tex. Tax Code § 171.1012(a)(3)(A)(iii).

                                                    3
               After phase one was concluded, the trial court ordered that “AMC was entitled to

include the costs to exhibit films to its customers in its Cost of Goods Sold subtraction under Section

171.1012 of the Tax Code” and ordered the parties to schedule a date for phase two of the trial “to

determine the refund amount.” Prior to phase two, the parties reached an agreement delineating the

majority of exhibition costs that AMC could include in the COGS subtraction. The parties, however,

were unable to agree about certain facility-related costs, such as rent and depreciation, associated

with the square footage of AMC’s movie theater auditoriums and proceeded to phase two of the trial

to resolve this dispute. See id. § 171.1012(c) (including within COGS “all direct costs of acquiring

or producing the goods,” such as depreciation and “cost of renting or leasing equipment, facilities,

or real property directly used for the production of the goods”).

               The parties joined issue on the percentage of the auditorium space that should be

considered for determining direct costs of “production.” See id. § 171.1012(a)(2) (defining

“production”), (c). AMC asserted that the costs associated with the entire square footage of its

auditoriums should be included in the COGS calculation, and AMC’s witness testified about the

sight, sound, and the controlled environment in its auditoriums. The Comptroller countered that the

only costs that should be included were costs associated with the square footage occupied by the

speakers and the screens in the auditoriums. The Comptroller did not call witnesses, supporting its

arguments based on the common knowledge of a moviegoer.

               The parties stipulated to each side’s competing calculation of the amount of AMC’s

refund, depending on the trial court’s resolution of the parties’ dispute concerning the allowable

percentage of costs related to the auditorium space, as follows:



                                                  4
        If the Court agrees with AMC’s position that 67.67% of the disputed costs qualify,
        the tax refund amounts due Plaintiff are $579,656 for Report Year 2008 and
        $591,293 for Report Year 2009. If the Court agrees with Defendants’ position that
        13.42% of the disputed costs qualify, the tax refund amount[s] due Plaintiff are
        $229,709 for Report Year 2008 and $269,959 for Report Year 2009. Plaintiff is also
        due assessed penalty, assessed interest, and statutory interest.


                In its final judgment, the trial court agreed with the Comptroller as to the costs

associated with the amount of the auditoriums’ square footage that should be included and ordered

refunds based on the corresponding stipulated amounts for report years 2008 and 2009. The trial

court ordered the Comptroller to issue one or more refund warrants to AMC in the amount of

$499,668 in franchise tax, plus appropriate interest and penalties. The trial court also made separate

findings of fact and conclusions of law as to both phases of the trial. These cross-appeals followed.


                                   STANDARDS OF REVIEW

                The parties’ issues concern statutory construction, a question of law that we review

de novo. See First Am. Title Ins. Co. v. Combs, 258 S.W.3d 627, 631 (Tex. 2008). Our primary

concern in construing a statute is the express statutory language. See Galbraith Eng’g Consultants,

Inc. v. Pochucha, 290 S.W.3d 863, 867 (Tex. 2009). “We thus construe the text according to its

plain and common meaning unless a contrary intention is apparent from the context or unless such

a construction leads to absurd results.” Presidio Indep. Sch. Dist. v. Scott, 309 S.W.3d 927, 930

(Tex. 2010) (citing City of Rockwall v. Hughes, 246 S.W.3d 621, 625–26 (Tex. 2008)). We “‘read

the statute as a whole and interpret it to give effect to every part.’” Railroad Comm’n of Tex. v. Texas

Citizens for a Safe Future & Clean Water, 336 S.W.3d 619, 628 (Tex. 2011) (quoting City of San



                                                   5
Antonio v. City of Boerne, 111 S.W.3d 22, 25 (Tex. 2003)). Further, a precondition to deference to

an agency’s interpretation of a statute is ambiguity. See Combs v. Roark Amusement & Vending,

L.P., 422 S.W.3d 632, 635 (Tex. 2013) (describing agency-deference doctrine); Combs v. Health

Care Servs. Corp., 401 S.W.3d 623, 629–30 (Tex. 2013) (same). And “[t]axing statutes are

construed strictly against the taxing authority and liberally for the taxpayer.” See Morris v. Houston

Indep. Sch. Dist., 388 S.W.3d 310, 313 (Tex. 2012).

               The parties also challenge the trial court’s findings of fact and conclusions of law.

We review the trial court’s findings of fact for legal and factual sufficiency of the evidence by the

same standard applied to a jury verdict. Ortiz v. Jones, 917 S.W.2d 770, 772 (Tex. 1996); Anderson

v. City of Seven Points, 806 S.W.2d 791, 794 (Tex. 1991); see City of Keller v. Wilson,

168 S.W.3d 802, 827–28 (Tex. 2005) (describing legal sufficiency standard of review); Cain v. Bain,

709 S.W.2d 175, 176 (Tex. 1986) (describing factual sufficiency standard of review). We review

a trial court’s conclusions of law de novo to determine their correctness. BMC Software Belg., N.V.

v. Marchand, 83 S.W.3d 789, 794 (Tex. 2002). “But we will not reverse an erroneous conclusion

if the trial court rendered the proper judgment.” City of Austin v. Whittington, 384 S.W.3d 766, 779

n.10 (Tex. 2012); see BMC Software, 83 S.W.3d at 794.


                                            ANALYSIS

Comptroller’s Cross-Appeal

               In his cross-appeal, the Comptroller asserts in one issue that the trial court erred in

concluding that AMC may include its exhibition costs in its COGS subtraction under section

171.1012 of the Tax Code for report years 2008 and 2009. See Tex. Tax Code § 171.1012.

                                                  6
According to the Comptroller, exhibiting films does not constitute a “good” because AMC does not

sell “tangible personal property” but intangible property, or a film-watching service, or non-property.

See id. § 171.1012(a)(1) (defining “goods” to include “tangible personal property”), (3)(A) (defining

“tangible personal property”), (3)(B) (excluding “intangible property” and “services” from definition

of “tangible personal property”).

                As part of his issue, the Comptroller challenges the legal sufficiency of the evidence

to support the trial court’s finding of fact no. 4, which states:


        When AMC exhibits movies and other content to its paying customers, it produces
        personal property that can be seen, weighed, measured, felt, or touched or that is
        perceptible to the senses in any other manner for sale in its ordinary course
        of business.


This finding of fact tracks the definition of “tangible personal property” in chapter 171 of the Tax

Code. See id. § 171.1012(a)(3)(A)(i). The Comptroller also challenges the trial court’s conclusion

of law no. 2, which states:


        When AMC exhibits movies and other content to its paying customers, AMC
        produces goods for sale in the ordinary course of business under Section 171.1012,
        and may therefore include the costs of exhibiting movies and other content to its
        paying customers in its cost-of-goods-sold deduction under Section 171.1012 of the
        Texas Tax Code.


See id. § 171.1012(a)(1) (defining “goods”), (b) (allowing taxable entity to subtract its

cost-of-goods-sold for purpose of determining taxable margin), (c) (including “all direct costs of

acquiring or producing the goods” as COGS).




                                                   7
               The Comptroller’s issue turns on the meaning of “goods” as that term is defined in

section 171.1012(a)(1). See Roark Amusement, 422 S.W.3d at 636 (“If a term is expressly defined

by statute, [courts] must follow that definition.”); Entergy Gulf States, Inc. v. Summers,

282 S.W.3d 433, 437 (Tex. 2009) (“We do not look to the ordinary, or commonly understood

meaning of the term because the Legislature has supplied its own definition, which we are bound to

follow.” (citing Tex. Gov’t Code § 311.011(b))). As previously stated, subsection (a)(1) of section

171.1012 defines “goods” to mean “tangible personal property sold in the ordinary course of

business of a taxable entity.” Subsection (a)(3)(A)(i) defines “tangible personal property” broadly

to mean “personal property that can be seen, weighed, measured, felt, or touched or that is

perceptible to the senses in any other manner.” Tex. Tax Code § 171.1012(a)(3)(A)(i). The parties

do not assert, nor do we find, that this language of section 171.1012 is ambiguous. Thus, we

construe the text of the statutory definitions according to its “plain and common meaning.” See

Scott, 309 S.W.3d at 930.

               The legislature defined “tangible personal property” to include “personal property”

that can be “seen” or “that is perceptible to the senses in any other manner.” See Tex. Tax Code

§ 171.1012(a)(3)(A)(i); TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011)

(“We presume that the Legislature chooses a statute’s language with care, including each word

chosen for a purpose, while purposefully omitting words not chosen.”). The legislature did not

define “personal property,” so we interpret that phrase based on its common meaning. See Scott,

309 S.W.3d at 930. “Personal property” means “property other than real property consisting in

general of things temporary or moveable.” Webster’s Third New Int’l Dictionary 1687 (2002).



                                                8
Further, “seen” is the past participle of “see,” “see” means to “perceive by the eye,” id. at 2054, and

“perceive” means “to become aware of through the senses.” Id. at 1675.

               AMC presented evidence to support its position that its film product falls within the

statutory definition of “tangible personal property.” AMC’s witnesses described AMC as a film

distributor and its film product as “a tangible product visible to the sight and sound—perceptible to

sound,” and as “creative content that is consumed.” One of AMC’s witnesses described its film

product and the process from the time that AMC receives a film to the time the film is shown in

AMC’s theaters as follows:


       The film comes in to us in multiple parts, multiple pieces, from multiple locations.
       We take that 35-millimeter film. We construct. We assemble. We put the
       advertisements. We put the public service announcements. We put the trailers. We
       put the feature film. We put the cues for the lights, the curtains, all in one contiguous
       piece of 35-millimeter celluloid film.

       Once we’ve constructed—assembled it if it’s damaged in any way, we may remove
       any damaged parts simply by cutting them out and splicing them back together. We
       then install that on a platter. That is then fed through a 35-millimeter projector.
       Then those images are produced on a screen for the sight and sound consumption of
       our guests.


The witness also answered “Yes” when asked: “Applying the specific definition from our

legislature, is the movie that’s projected on the screen tangible personal property?” AMC’s evidence

included excerpts from the deposition of a representative of the Comptroller who agreed that “a

movie on the big-big screen would meet the definition of (3)(A)(i).”

               The Comptroller argues that AMC’s product does not fall within the meaning of

“tangible personal property” because it is either “intangible property” or a movie-viewing “service.”



                                                  9
See Tex. Tax Code § 171.1012(a)(3)(B) (excluding “intangible property” and “services” from

definition of “tangible personal property”). Because the statute does not define “intangible property”

or “services,” we apply their common and ordinary meanings. See Scott, 309 S.W.3d at 930.

“Intangible property” means “property having no physical substance apparent to the senses:

incorporeal property (as choses in action) often evidenced by documents (as stocks, bonds, notes,

judgments, franchises) having no intrinsic value or by rights of action, easements, goodwill, trade

secrets.” Webster’s at 1173. “‘[S]ervice’ is defined as “the performance of work commanded or

paid for by another.” Newpark, 422 S.W.3d at 54 n.8 (defining “service” according to common

meaning in context of section 171.1012 and citing definition in Webster’s); see also Webster’s at

2075 (defining “service,” among other meanings, as “useful labor that does not produce a tangible

commodity”), 458 (defining commodity as “economic good”).

               According to the Comptroller, AMC does not sell the film, but the right to watch the

film at a certain time and place. The Comptroller focuses on the customer’s purchase of a ticket,

which the Comptroller contends is a license, and the fact that AMC’s customers leave AMC’s

theaters with experiences and memories but without a copy of the film. See Rylander v. Bandag

Licensing Corp., 18 S.W.3d 296, 298 (Tex. App.—Austin 2000, pet. denied) (describing licensing

of patents as intangible property rights); Jordon v. Concho Theaters, 160 S.W.2d 275, 276 (Tex. Civ.

App.—El Paso 1941, no writ) (“A ticket to a theatre is a mere revocable license.”). But the

definition of “tangible personal property” in section 171.1012 does not have a take-home

requirement. See Roark Amusement, 422 S.W.3d at 637 (declining to engraft extra-statutory

requirements “under the guise of interpreting it”).



                                                 10
               Further, the Comptroller’s characterization of AMC’s film exhibition as “intangible

property” and “services” conflicts with section 171.1012(a)(3)(A)(ii), which provides that “tangible

personal property” also means:


       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.


Tex. Tax Code § 171.1012(a)(3)(A)(ii). This subsection makes clear that for purposes of the COGS

calculation, “tangible personal property” includes films “without regard to the means or methods of

distribution or the medium in which the property is embodied.” See id.; Roark Amusement,

422 S.W.3d at 636 (requiring court to follow statutory definition of term); Texas Citizens,

336 S.W.3d at 628 (construing statute as whole).3

               Although the Comptroller presented evidence to support his position that AMC’s

product was not “tangible personal property,” it was within the province of the trial court to resolve

conflicts in the evidence in favor of AMC. See City of Keller, 168 S.W.3d at 819–20. Applying the

plain meaning of “tangible personal property” as that phrase is defined in section

171.1012(a)(3)(A)(i) and viewing the evidence under the applicable standard of review, we conclude

that the evidence was legally sufficient to support the trial court’s finding of fact no. 4. See id. at


       3
            One of AMC’s witnesses answered “Yes” when asked: “Is that actual screen up
there—what I’ll call the big screen—is it kind of a medium on which the movie is embodied?” He
also testified that AMC mass distributes films.

                                                  11
827–28. Given this conclusion, we also conclude that the trial court did not err in concluding that

AMC was entitled to include its exhibition costs in its COGS subtraction. See BMC Software,

83 S.W.3d at 794. Thus, we overrule the Comptroller’s issue on cross-appeal.4


AMC’s appeal

               In one issue, AMC challenges the trial court’s ruling in phase two that only AMC’s

costs associated with the square footage housing the speakers and screens in AMC’s auditoriums




       4
           The Comptroller urges that AMC is limited on appeal to its theory under subsection
(a)(3)(A)(i) of section 171.1012 because the trial court only made findings of facts as to that
subsection. See Tex. R. Civ. P. 298 (addressing requests for amended or additional findings), 299
(addressing omitted findings). Although we need not reach this argument because we have
concluded that the evidence was sufficient to support the trial court’s finding that AMC’s product
is “tangible personal property” as defined in subsection (a)(3)(A)(i), we note that a trial court
generally is not required to make additional findings “if the requested findings will not result in a
different judgment.” See Flanary v. Mills, 150 S.W.3d 785, 792 (Tex. App.—Austin 2004, pet.
denied); see also Associated Tel. Directory Publishers, Inc. v. Five D’s Publ’g Co., 849 S.W.2d 894,
901 (Tex. App.—Austin 1993, no writ) (“A trial court is not required to set out in detail every reason
or theory by which it arrived at its final conclusions.”).

        AMC also cites a subsequent amendment to section 171.1012 to support its position that its
exhibition costs may be included in its COGS subtraction under subsection 171.1012. See Act of
June 14, 2013, 83d Leg., R.S., ch. 1232, § 10, 2013 Tex. Sess. Law Serv. 3105, 3109 (current
version at Tex. Tax Code § 171.1012(t)). Subsection (t) now states:

       If a taxable entity that is a movie theater elects to subtract cost of goods sold, the cost
       of goods sold for the taxable entity shall be the costs described by this section in
       relation to the acquisition, production, exhibition, or use of a film or motion picture,
       including expenses for the right to use the film or motion picture.

Id. The Comptroller agrees that AMC may include its exhibition costs based on subsection (t) going
forward. Because we uphold the trial court’s ruling in phase one based on the plain meaning of
“tangible personal property” as defined in section 171.1012 and our review of the evidence, however,
we do not address the subsequent amendment to the statute in our analysis as to report years 2008
and 2009.

                                                   12
qualified as COGS under section 171.1012. AMC contends that the trial court erred in deferring to

the Comptroller’s interpretation of section 171.1012 to determine the amount of franchise taxes

owed and that the “undisputed evidence conclusively proved that costs associated with the entire

auditorium were direct costs of producing the films AMC sells to its customers.” See Tex. Tax Code

§ 171.1012(c).     AMC urges that it “uses the entire auditorium space in ‘production,’ as

unambiguously defined by Tax Code section 171.1012(a)(2).” See id. § 171.1012(a)(2).

                As part of its issue, AMC challenges the trial court’s conclusion of law no. 3,

which states:


       Interpretations given to statutes by state agencies are entitled to deference when, as
       here, a tax arguably applied and the court is weighing competing interpretations of
       the amount owed. The Comptroller’s interpretation of the amount owed in the
       present case is reasonable under the plain language of Section 171.1012, Tax Code.


AMC argues that the trial court erred by deferring to the Comptroller’s interpretation of the statute

because section 171.1012(a)(2), which defines “production,” is not ambiguous. See id. We agree.

Thus, we conclude that the trial court erred by concluding that the Comptroller’s interpretation was

entitled to deference.    See Roark Amusement, 422 S.W.3d at 635 (requiring ambiguity as

precondition to deferring to agency’s interpretation of statute). The issue then is whether the “trial

court rendered the proper judgment” as to the amount of refund owed to AMC despite this erroneous

conclusion of law. See Whittington, 384 S.W.3d at 779 n.10; BMC Software, 83 S.W.3d at 794.

                In this context, AMC challenges the trial court’s finding of fact no. 8, and relatedly

nos. 7, 9, and 10, which address AMC’s exhibition costs and the amount of AMC’s refund for report

years 2008 and 2009 based on those costs. The challenged findings state:

                                                 13
        7.      13.42% of the Disputed Costs are exhibition costs. This includes 75% of the
                costs associated with the square footage used to sell concessions, which the
                parties stipulate is 2.19% of the Disputed Costs. This also includes 100% of
                the costs associated with the square footage used to project the movies and
                alternative content into the auditorium, which the parties stipulate is 9.67%
                of the Disputed Costs. Finally, this includes 100% of the costs associated
                with the square footage of AMC’s auditoriums housing the speakers and
                screens, which the parties stipulate is 1.56% of the Disputed Costs. This adds
                up to 13.42% of the Disputed Costs.

        8.      The costs associated with the square footage for the auditoriums, other than
                the square footage housing the speakers and screens, are not exhibition costs.

        9.      Based on 13.42% of the AMC’s cost-of-goods-sold for Report Year 2008 is
                $1,091,269,621. AMC’s refund for Report Year 2008 is $229,709, plus
                assessed interest, penalty, and statutory interest.

        10.     AMC’s cost-of-goods sold for Report Year 2009 is $1,108,701,467. AMC’s
                refund for Report Year 2009 is $269,959, plus assessed interest, penalty, and
                statutory interest.


The percentages of the disputed costs associated with the square footage of the auditoriums and the

corresponding amounts of refunds in findings nos. 7, 9, and 10 follow from the parties’ stipulations

in the event that the trial court ruled in favor of the Comptroller as to the parties’ dispute about costs

associated with AMC’s auditorium space.

                AMC contends that finding of fact no. 8 is erroneous because it is not based on

evidence offered at trial and, therefore, that the trial court’s related findings based on the parties’

stipulations as to the Comptroller’s calculations of the amounts owed also are erroneous. According

to AMC, its evidence “established that the auditorium is integral to the visual and acoustic

production” and that it uses the entire auditorium space in “production” as that term is defined in

section 171.1012(a)(2). See Tex. Tax Code § 171.1012(a)(2); Roark Amusement, 422 S.W.3d at

                                                   14
636; Entergy, 282 S.W.3d at 437. Section 171.1012(a)(2) defines “production” broadly to include

“construction, installation, manufacture, development, mining, extraction, improvement, creation,

raising, or growth.” Tex. Tax Code § 171.1012(a)(2); see Tex. Gov’t Code § 311.005(13) (use of

word “includes” is term of enlargement and “not of limitation or exclusive enumeration”); see also

Tex. Tax Code § 171.1012(c) (defining COGS to “include[] all direct costs of acquiring or producing

the goods”). Relevant to this appeal, the words “creation” and “improvement” are not defined in the

statute so we apply their common meanings. See Scott, 309 S.W.3d at 930. “Create” means “to

bring into existence,” Webster’s at 532, and “improve” means “to make greater in amount or degree”

and “to enhance in value or quality.” Id. at 1138.

               AMC’s witness in phase two testified about AMC’s “improvement” and “creation”

of its film product in its auditorium space. He testified about the sight, sound, and lighting in the

auditorium space and described the way that AMC sets up this space “both from an acoustic integrity

perspective and the way we—what we call EQ, or equalized each of those cinema auditorium

spaces.” He testified as follows:


       Certainly, we improved on what we’re originally provided by our studio partners
       because if we did not, if you were to go to one of our theaters and that auditorium did
       not have an auditorium specific sound EQ or equalization, the dialogue would not be
       as intelligible, the surround coverage and the associate of what we call SPLs or sound
       pressure levels, some of them would be too loud; some of them would be too high
       or hot as we call it. You might not have enough low frequency.

       We definitely change what we are originally providing from our studio partners and
       we create a unique audio and visual experience.

       Now, on the visual side, we do it specific to the screen type. The screen gave
       basically what type of screen vinyl is used in the auditorium, what type of projector
       is used.

                                                 15
       Everything has to be combined and that combination is what really creates the unique
       auditorium specific entertainment experience.

       ....

       A lot of the overall auditorium design is driven by, I mean, on the audio side, how
       many surrounds we need, what the spacial distance, physical distance between
       surround so that every patron gets equivalent and equal quality and coverage. The
       screen—both the screen type, the screen game, the screen size, everything is—they
       are all taken into account to where we meet, you know, both competitive and
       technology industry standards. . . .

       ....

       So everything is taken into account, and truly, we are realtime changing what comes
       out of the projection booth based on what’s in the auditorium.

       ....

       There are literally dozens and dozens and dozens of different technical elements that
       go into the design and the eventual implementation inside each theater auditorium.


AMC’s witness also answered “Yes” when asked if the auditorium was “directly used for

production.” He further described the auditorium space as “an acoustic chamber,” “production area”

and “controlled environment with multi dimensional surround audio” and testified that “there is

creation going on in that auditorium in near realtime.”

               During phase two, the Comptroller asserted facts based on the common experiences

of moviegoers.5 The Comptroller’s counsel argued in his opening statement:


       And, honestly, Judge, I don’t even think you need evidence in this case, unless you
       have never been to a movie theater before, because you know what happen[s] in a


       5
       Similarly, the Comptroller argues on appeal that “the facts needed to decide this appeal are
common knowledge to anyone who watches movies in movie theaters.”

                                                16
       movie theater just as well as anyone else does. They can explain in greater detail, but
       the point for this case is, where is—what they have—when they turned this
       35-millimeter film into a product for the customers, where does that happen? It
       happens in the projectors, the screens, and the speakers. And I don’t think anything
       they can say will change that. What happened in the auditorium is not relevant.


The Comptroller asserted that there is “consumption space” and “production space,” that only

production space counts, and that the auditoriums are consumption space. According to the

Comptroller’s position, AMC’s “goods”—the “sights and sounds” of the film—“are produced in the

screens and speakers” and “experienced, not produced, in the auditoriums.”6 The Comptroller,

however, did not call any witnesses to rebut AMC’s evidence or otherwise present evidence during

phase two regarding the design and function of AMC’s auditorium space to support his

factual assertions.

               The plain text of section 171.1012(a)(2) also does not support the Comptroller’s

theory that production space and consumption space are mutually exclusive. See Roark Amusement,

422 S.W.3d at 637 (declining to engraft extra-statutory requirements); City of Rockwall, 246 S.W.3d

at 629 (declining to read additional words into statute in construing statute). The definition of

“production” does not reference or exclude costs that also are associated with consumption space.

See Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 540 (Tex. 1981) (“Only when it is

necessary to give effect to the clear legislative intent can we insert additional words or requirements

into a statutory provision.”).




       6
          Both at trial and on appeal, the Comptroller equates the experience of watching a film in
a theater with watching a DVD on a television at home.

                                                  17
                The Comptroller focuses on subsections (e)(1) and (3) of section 171.1012 to support

his position that costs associated with the auditorium space, other than the screens and speakers, are

not COGS. Subsections (e)(1) and (3) expressly exclude from COGS “the cost of renting or leasing

equipment, facilities, or real property that is not used for the production of the goods” and

“distribution costs, including outbound transportation costs.” See Tex. Tax Code § 171.1012(e)(1),

(3). AMC presented evidence at trial that the space of the entire auditorium was used in the

“production”—as that term is defined in section 171.1012(a)(2)—of its film product, and the

Comptroller did not present evidence to controvert AMC’s evidence. See id. § 171.1012(a)(2);

Roark Amusement, 422 S.W.3d at 636 (following definition in statute); Entergy, 282 S.W.3d at

437 (same).

                Applying the plain meaning of “production” as defined in section 171.1012(a)(2) and

viewing the evidence under the applicable standard of review, we conclude that the evidence was

legally and factually insufficient to support the trial court’s finding of fact no. 8 and, therefore, its

related findings nos. 7, 9, and 10. See City of Keller, 168 S.W.3d at 827–28; Cain, 709 S.W.2d at

176. AMC’s evidence established that its costs associated with the square footage of its auditoriums

are direct costs of producing its product, and the Comptroller failed to present controverting

evidence. See Tex. Tax Code § 171.1012(a)(2), (c).7 Thus, we sustain AMC’s issue and, based on


        7
          The parties join issue on whether subsection (o) is an alternative ground supporting AMC’s
position that the costs associated with its auditorium space should be included in the COGS
subtraction. See Tex. Tax Code § 171.1012(o). Subsection (o) allows taxable entities that primarily
distribute or produce films to include expenses related to using the films, as well as producing the
films, in their COGS subtraction. See id. Because we have concluded that the challenged findings
in phase two are not supported by the evidence, we need not address this alternative theory for
including AMC’s costs associated with its auditorium space as COGS. See Tex. R. App. P. 47.1.

                                                   18
the parties’ stipulations as to AMC’s calculation of the amount of refund owed, render the judgment

that the trial court should have rendered. See Tex. R. App. P. 43.3 (generally requiring appellate

court to render judgment trial court should have rendered when reversing trial court’s judgment).


                                         CONCLUSION

               For these reasons, we affirm the trial court’s ruling as to phase one, reverse the trial

court’s ruling as to phase two, and render judgment, pursuant to the parties’ stipulations, that AMC

is entitled to a refund in the amount of $579,656 for report year 2008 and $591,293 for report

year 2009, plus appropriate penalty and interest.



                                       __________________________________________

                                       Melissa Goodwin, Justice

Before Chief Justice Rose, Justices Goodwin and Field

Affirmed in Part; Reversed and Rendered in Part

Filed: April 30, 2015




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