                                 NO. 07-07-0172-CV

                            IN THE COURT OF APPEALS

                     FOR THE SEVENTH DISTRICT OF TEXAS

                                    AT AMARILLO

                                       PANEL D

                                  OCTOBER 28, 2008

                         ______________________________


          SOUTHWESTERN BELL TELEPHONE COMPANY, APPELLANT

                                          V.

SUSAN COMBS, SUCCESSOR-IN-INTEREST TO CAROLE KEETON STRAYHORN,
     COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS,
   AND GREG ABBOTT, ATTORNEY GENERAL FOR THE STATE OF TEXAS,
                           APPELLEES

                       _________________________________

              FROM THE 98TH DISTRICT COURT OF TRAVIS COUNTY;

      NO. D-1-GN-02-004559; HONORABLE MARGARET A. COOPER, JUDGE

                        _______________________________

Before QUINN, C.J., and CAMPBELL and PIRTLE, JJ.


                                       OPINION


      Appellant, Southwestern Bell Telephone Company (Bell), appeals from entry of

summary judgment in favor of Appellees, Susan Combs, successor in interest to Carole

Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas, and Greg Abbott,
Attorney General of the State of Texas, on Bell’s claim seeking a refund of franchise taxes.

The parties filed competing motions for summary judgment below. The trial court granted

the State’s motion and denied Bell’s motion. Bell appeals the trial court’s ruling and seeks

summary judgment in its favor. In support, Bell asserts the trial court erred in finding (1)

Bell’s end user common line charges, special access charges, and operator assistance

charges are Texas receipts for state franchise tax apportionment purposes; (2) the

Comptroller’s application of the franchise tax apportionment statute and rules to Bell did

not violate equal protection guarantees; and (3) certain testimony by Bell’s experts was

properly excluded. We affirm.


                                       Background


       In December 2002, Bell filed suit to recover $43,136,577.39 in franchise taxes and

interest paid under protest to the Comptroller.1 For calendar years 1996-2001,2 the

Comptroller apportioned Bell’s charges for customer access to its local telephone network



       1
         The Texas Tax Code authorizes suits to recover franchise taxes required to be paid
if the taxpayer first pays the tax under protest. Tex. Tax Code Ann. § 112.052(a) (Vernon
2008). The Tax Code also required Bell to sue both the Comptroller and the Attorney
General. § 112.053. The interests of the Comptroller and the Attorney General do not
diverge in this case. For convenience, we will refer to both collectively as “the
Comptroller.” In addition, provisions of the Texas Tax Code will hereafter be cited as “§
_____” or “Section ______.”
       2
         Because the disputed taxes were incurred between 1996 and 2001, tax statutes
and rules existing then are applicable to our analysis. Unless otherwise noted, however,
where there has been no material change in the applicable statutes or regulations, we will
cite to their current versions.

                                             2
to complete long distance calls and pay-per-use services such as operator assistance as

Texas receipts. Bell asserts these charges are exempt from apportionment as Texas

receipts because they constitute “receipts from interstate calls” or “revenues from calls in

interstate commerce.”


       This case necessarily involves technical and legal issues unique to the telephone

industry. Events that occurred in the telephone industry nationwide and in Texas from the

early 1980s through 2001 comprise the backdrop for understanding the issues

underscoring this appeal. As a result, it is necessary that we describe in greater detail

Bell’s operation during the period at issue as well as the applicable regulatory history

underlying the franchise tax exemptions sought by Bell.


       I.     The Antitrust Consent Decree


       Before 1982, American Telephone and Telegraph Company (AT&T) dominated the

national telecommunications industry. AT&T Corp. v. Iowa Utilities Bd., 525 U.S. 366, 414,

119 S.Ct. 721, 142 L.Ed.2d 835 (1999). AT&T and its corporate affiliates, known as the

“Bell System,” virtually controlled all long-distance telephone service, most local telephone

service, and a substantial amount of all telephone equipment manufacturing. See United

States v. American Tel. & Tel. Co., 552 F.Supp. 131, 222-23 (D.D.C. 1982), aff’d sub nom.

Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983).

However, in 1982, AT&T entered into an antitrust consent decree, known as the



                                             3
Modification of Final Judgment (MFJ) that ended its industry dominance. 552 F.Supp. at

160-170, 222-234.


       Under the MFJ, AT&T was required to divest itself of local exchange subsidiaries

and was grouped into regional operating companies which became known as the “Bell

Operating Companies (BOCs).” See 47 U.S.C. § 153 (4) (2001); SBC Communications,

Inc. v. F.C.C., 154 F.3d 226, 230 (5th Cir. 1998).        Bell was a BOC and provided

telecommunications services for customers physically located in Kansas, Arkansas,

Oklahoma, Missouri, and Texas. The United States was then divided into 161 Local

Access Transport Areas (LATAs)3 within which BOCs were permitted to operate and

provide local telephone service. 154 F.3d at 231. Within each LATA were local exchange

carriers (LECs)4 that connected their customers’ telephones to their networks and facilities.

Bell operates as an LEC in LATAs in Texas and other states.


       Because the MFJ permitted BOCs and/or LECs to retain their state-regulated, local

service monopolies, they became subject to various restrictions on their lines of business.

The restrictions were intended to ensure that the BOCs would not use their monopoly


       3
      A LATA is a continuous geographic area that may contain one or more telephone
exchanges or area codes. See 16 Tex. Admin. Code § 26.5(116) (2008).
       4
        “Local exchange carrier” is defined as “any person that is engaged in the provision
of telephone exchange service or exchange access.” 47 U.S.C. § 153 (26) (2001). An
“exchange service” is defined as “service within a telephone exchange, or within a
connected system of telephone exchanges within the same exchange area operated to
furnish to subscribers intercommunicating service of the character ordinarily provided by
the exchange service charge.” 47 U.S.C. § 153 (47) (2001).

                                             4
control over LECs to impede competition in other markets. United States v. Western Elec.

Co., 12 F.3d 225, 229 (D.C. Cir. 1993). For instance, an LEC might find it particularly easy

to attract local customers to contract for its long distance service and use its control of local

service to place its long distance competitors at a disadvantage. Iowa Utilities Board, 525

U.S. at 416. Thus, one such restriction prohibited LECs from offering any long distance

service between LATAs, or interLATA service.5 See Id.; SBC Communications, 154 F.3d

at 230; Western Elec. Co., 12 F.3d at 228. Thus, during the relevant time period, Bell was

prohibited from providing any long distance telephone services.6


       II.    Long Distance Telephone Service


       Because LECs such as Bell were prohibited from providing long distance telephone

service, long distance calls or interLATA calls were transmitted by interexchange carriers

(IXCs).7 AT&T Communications of Texas, L.P. v. Southwestern Bell Telephone Co., 186



       5
        “InterLATA service” means “telecommunications between a point located in a local
access and transport area and a point located outside such area.” 47 U.S.C. § 153 (21)
(2001).
       6
        Following the enactment of the Telecommunications Act of 1996, Pub.L. No. 104-
104, 110 Stat. 56, in 2000, the FCC modified the MFJ’s interLATA restriction. Section
601(a) of the 1996 Act freed BOCs from the MFJ’s prohibition against providing long
distance service if the BOC complied with certain provisions in the Act designed to reduce
competition and obtained FCC approval through a detailed application process. See 47
U.S.C. §§ 252, 271 (2001).
       7
        IXCs are long distance carriers permitted to transport calls across LATA boundaries
into other states. During this period, LEC’s customers independently contracted directly
with their IXC for long distance telephone service.

                                               5
S.W.3d 517, 521-22 (Tex. 2006). Under the MFJ, each LEC was allowed to transmit

telecommunications information only between points within a single LATA, providing what

is, basically, the traditional local telephone service. The MFJ required LECs to provide

their customers and IXCs equal exchange access8 to their network facilities for the purpose

of permitting IXCs to carry on their long distance telephone business.


       Thus, when a customer dialed a number in another LATA, the customer’s LEC

would first transmit the signal to an IXC’s Point of Presence (POP). In a typical interLATA

long distance call, the originating caller’s LEC transports the signal from the caller’s

telephone over the local loop9 to the LEC’s central office where the call is switched and

transported by a trunk line to the IXC’s POP.          This occurs nearly instantaneously.

Typically, the LEC has switched the caller to their IXC before the caller has completed

dialing the long distance number. Once the signal reaches the IXC’s long distance switch,

the IXC then switches the signal to its trunk facilities for transmission out-of-state to the


       8
       “Exchange access” is defined as “the offering of access to telephone exchange
services or facilities for the purpose of the origination or termination of telephone toll
services.” 47 U.S.C. § 153 (16) (2001). An “exchange area” is a geographic area, usually
comprising of a city and its environs, in which calls therein are treated as “local.” 16 Tex.
Admin. Code § 26.5(79) & (117), as amended, 24 Tex. Reg. 10056 (1999) (effective date:
November 23, 2000).
       9
        Bell’s local loop consists of a pair of copper wires extending from the customer’s
premises to the central office switch. Bell’s central office switching facilities provide a dial
tone to the customer’s telephone indicating the local network is available to accept
originating calls, carry numbers during the dialing process, transmit voice communication,
and direct the call to a local service address or IXC’s POP to be switched out-of-state.
Local switching systems are also connected to operator systems, directory assistance
systems, and 911 systems.

                                               6
local switch of a second LEC serving the receiving party. The second LEC switches the

signal to its local loop and ultimately the call is received. The second LEC then reverses

the process and a circuit is established over which the two parties can communicate.


        III.   Access and Operator Charges


        An IXC’s cost of replicating Bell’s local network and facilities to provide long distance

service from the LEC’s premises was prohibitive. Thus, IXCs needed access to Bell’s

network in order to sell long distance services to their customers, and the IXC’s customers

needed access to the LEC’s network to complete long distance services purchased from

IXCs.    To recompense Bell for costs associated with maintaining its facilities and

equipment utilized by IXCs and the IXCs’ customers, the Federal Communications

Commission10 adopted uniform access charge rules. The FCC’s rules required LECs to

record their revenues in accordance with specified accounting rules and deposit accounts,

determine what fraction of the LEC’s regulated expenses and investments in its facilities



        10
         Companies providing telephone service have traditionally been regulated as
monopolistic public utilities. Verizon Communications, Inc. v. F.C.C., 535 U.S. 467, 477,
122 S.Ct. 1646, 1661, 152 L.Ed.2d 701 (2002) . See 70 Tex. Jur. 3d Telecommunications
§ 2 (1999). As such, Bell is subject to federal regulation by the FCC; Telecommunications
Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (codified in various sections of titles 15 and
47 of the United States Code) (“Telecommunications Act of 1996"), and state regulation
by the Public Utilities Commission of Texas. Public Utility Regulatory Act, Tex. Util. Code
§§ 11.001-64.203. The FCC sets long distance rates including access charges for
interstate long distance service while the PUC sets access charges for intrastate long
distance service. See AT&T Communications of Texas, 186 S.W.3d at 521-22; Public
Utility Com’n of Texas v. Allcomm Long Distance, Inc., 902 S.W.2d 662, 664
(Tex.App.–Austin 1995, writ denied).

                                                7
or network should be allocated to providing interstate access, and set charges or tariffs11

Bell could charge its customers and IXCs. See Access Charge Reform, CC Docket No.

96-262, First Report and Order, 12 FCC Red 15982, 15998-99 (1997) (Access Charge

Reform Order), aff’d, Southwestern Bell Telephone Co. v. F.C.C., 153 F.3d 523 (8th Cir.

1998).


          At issue, here, are Bell’s revenues deposited in two FCC denominated deposit

accounts for Network Access Revenues12 and a customer account for various pay-per-use

services as follows:




         11
          A telecommunication tariff defines a service, the terms and conditions of the
service, how it will be provided, and the rates associated with the service to be charged to
the customer. See 47 U.S.C. § 203 (2001); Mincron SBC Corp. v. Worldcom, Inc., 994
S.W.2d 785, 789 (Tex.App.–Houston [1st Dist.] 1999, no pet.); Southwestern Bell
Telephone Co. v. Metro-Link Telecom, Inc., 919 S.W.2d 687, 691 (Tex.App.–Houston [14th
Dist.] 1996, pet. denied) (“A tariff is a document which lists a public utility’s services and
rates for those services.”) The filed tariff governs a telecommunications service carrier’s
relationship with its customers, and such tariffs have the force and effect of law until
suspended or set aside. 994 S.W.2d at 789; 919 S.W.2d at 692 (citing Keogh v. Chicago
& Northwestern Railway, 260 U.S. 156, 162-63, 43 S.Ct. 49, 67 L.Ed. 183 (1922)). In
1995, Bell’s Access Service Tariff filed with the Texas Public Utility Commission applied
to “the provision of Carrier Common Line, End User Access, Switched Access, and Special
Access services, and other miscellaneous services. . . .” See AT&T Communications of
the Southwest v. Public Utility Com’n of Texas, 906 S.W.2d 209, 213 n.6 (Tex.App.–Austin
1995, writ denied).
         12
         LEC revenues are recorded in a series of uniform accounts established by the
FCC. See 47 C.F.R. § 32.4999(n) (2001). “Network Access Revenues” are deposited in
FCC Accounts 5080-5084 and are “derived from the provision of exchange access services
to an interexchange carrier or to an end user of telecommunications services beyond the
exchange carrier’s network.” 47 C.F.R. § 32.4999(i) (2001).

                                              8
       A.        End User Common Line Charges


       The End User Common Line Charge (EUCL) is a flat rate charge designed to

recover a portion of Bell’s cost of providing the local loop to transport customers’ long

distance calls to IXC POPs. Bell’s EUCL revenues are recorded in its 5081 Account.13

See 47 C.F.R. § 32.5081 (2001). The EUCL charge is paid by local subscribers whether

any long distance call is actually made or received.


       B.        Special Access Charges


       Bell also charges a fixed monthly fee for access to dedicated telephone lines or

circuits installed by Bell within the local exchange network that are used to transport long

distance calls directly from customers to their IXC POP. Dedicated lines transport a

customer’s long distance call directly through Bell’s central office to the IXC’s POP without

being switched. Bell’s revenues from customer access to dedicated lines is accounted for

in Account 5083.14 See 47 C.F.R. § 32.5082 (2001).


       C.        Operator Assistance Charges


       Although Bell is prohibited from offering long distance telephone service, Bell is

permitted to offer directory and operator assistance to customers making long distance



       13
            The tax in issue related to Account 5081 is $24,115,771.14.
       14
            The tax in issue related to Account 5083 is $18,922,278.76.

                                              9
calls. For instance, these charges occur when a customer located in Texas using a Texas

phone facility while placing an interstate intraLATA call dials a Bell operator for directory

assistance or assistance to complete the long distance call. The charges are pay-per-use

charges. These revenues are deposited in Account 5160.1.15 47 C.F.R. § 32.5160 (1995).


       IV.       Texas’s Franchise Tax and Current Controversy


       Texas’s franchise tax is imposed upon all domestic and foreign corporations doing

business in Texas. § 171.001. The granting of the privilege to transact business in Texas

confers economic benefits, including the opportunity to realize gross income and the right

to invoke the protection of local law. Bullock v. National Bancshares Corp., 584 S.W.2d

268, 270 (Tex. 1979), cert. denied, 444 U.S. 1016, 100 S.Ct. 667, 62 L.Ed.2d 645 (1980).

The Texas franchise tax is a tax on the value of this privilege. Id.


       During calender years 1995-2001, Bell was an LEC in a number of states including

Texas. Because Bell conducted business inside and outside of Texas, its franchise tax

was calculated by an apportionment formula. Its company-wide taxable capital (net worth)

and taxable earned surplus (net income) were apportioned between Bell’s business done

in Texas and business done elsewhere to obtain a correct assessment of Texas franchise

taxes. This calculation and the resulting effect of having a larger proportion of gross

receipts from business done in Texas may be stated as follows:



       15
            The tax in issue related to Account 5160.1 is $98,527.49.

                                              10
       Simply described, “net taxable earned surplus” is determined by (1) adjusting
       the amount of a corporate taxpayer’s federal taxable income to yield “taxable
       earned surplus,” (2) “apportioning” or attributing the taxable earned surplus
       to Texas; and (3) subtracting various allowable deductions from the
       apportioned taxable earned surplus. Tex. Tax Code Ann. § 171.110(a)
       (West Supp. 2004). . . .


       Under tax code sections 171.106 and 171.110(2), taxable earned surplus is
       to be “apportioned” to Texas by multiplying it by a fraction, the numerator of
       which is the corporation’s “gross receipts from business done in this state,”
       as determined under section 171.1032, tax code, and the denominator of
       which is the corporation’s “gross receipts from its entire business,” as
       determined under section 171.1051. Id. at §§ 171.106(b), 171.110(a)(2).
       [footnote omitted]. Thus, the larger the corporation’s “gross receipts from
       business done in this state,” the larger the apportionment factor, and the
       larger percentage of its taxable earned surplus is subject to the franchise tax.


Anderson-Clayton Bros. Funeral Home, Inc. v. Strayhorn, 149 S.W.3d 166, 169

(Tex.App.–Austin 2004, pet. denied).


       As in Anderson-Clayton, the center of the present dispute is the apportionment of

Bell’s receipts as either Texas or non-Texas receipts. If Bell shows that more of its receipts

in any tax year were not “gross receipts for business done in Texas” or were subject to an

exemption from apportionment as Texas receipts, then the lesser the apportionment factor

and consequently the lesser percentage of its taxable earned surplus is subject to the

Texas franchise tax, i.e., Bell owes less state franchise taxes. Conversely, if the opposite

is true, then the larger the apportionment factor and the greater its taxable earned surplus

subject to the Texas franchise tax. Doing more business in Texas generally results in

higher franchise taxes.


                                             11
       The earned surplus apportionment statute in existence between 1995-2001 provided

that Texas receipts are from “business done in Texas” as follows:


       171.1032. Determination of Gross Receipts From Business Done in this
       State for Taxable Earned Surplus

       (a) Except for the gross receipts of a corporation that are subject to the
       provisions of Section 171.1061, in apportioning taxable earned surplus, the
       gross receipts of a corporation from its business done in this state is the sum
       of the corporation’s receipts from:

       (1) each sale of tangible personal property if the property is delivered or
       shipped to a buyer in this state regardless of the FOB point or another
       condition of the sale, and each sale of tangible personal property shipped
       from this state to a purchaser in another state in which the seller is not
       subject to any tax on, or measured by, net income, without regard to whether
       the tax is imposed;

       (2) each service performed in this state;

       (3) each rental of property situated in this state;

       (4) each royalty for the use of a patent or copyright in this state; and

       (5) other business done in this state.


Section 171.1032.16


       In addition to this “gross receipts” statute, the Comptroller had adopted rules that

exempted certain telephone company receipts from apportionment as Texas receipts for

franchise tax purposes. The Comptroller established the following exemption when


       16
        Section 171.1032 of the Texas Tax Code was deleted in 2008. Nevertheless,
because this statute was applicable during the period at issue, we will refer to this statute
as “Section 171.1032" or “§ 171.1032" throughout this opinion for convenience.

                                             12
apportioning the taxable capital (net worth) component of the franchise tax for telephone

companies as follows:


       Telephone company receipts. All receipts for calls of a telephone company
       in Texas are Texas receipts, except for receipts from interstate calls.


34 Tex. Admin. Code § 3.549(e)(43) (2008) (emphasis added).


       The Comptroller also established the following exemption when apportioning the

earned surplus (net income) component of the franchise tax for telephone companies as

follows:


       Telephone companies. All revenues for telephone calls in Texas are Texas
       receipts except for revenues from calls in interstate commerce.


34 Tex. Admin. Code § 3.557(e)(39), as adopted, 17 Tex. Reg. 7667 (1991) (effective date:

November 13, 1992). (emphasis added).17 These Rules required that “[s]ervice receipts

[be] apportioned to the location where the service is performed.” 34 Tex. Admin. Code §§

3.549(e)(38) (2008); 34 Tex. Admin. Code § 3.557 (1992).



       17
         For convenience, this provision will be referred to as “34 Tex. Admin. Code § 3.557
(1992)” throughout the remainder of this opinion. This Rule was amended in 2003 to
further clarify the Comptroller’s exemption. See 34 Tex. Admin. Code § 3.557(e)(39)
(2008), as amended, 28 Tex. Reg. 1218 (Effective: February 12, 2003). The new Rule is
prospective in its application and does not appy here. “Adjudication deals with what the
law was; rulemaking deals with what the law will be.” Bowen v. Georgetown University
Hospital, 488 U.S. 204, 221, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988) (Scalia, J.,
concurring). See Amarillo Independent School Dist. v. Meno, 854 S.W.2d 950, 958
(Tex.App.–Austin 1993, writ. denied).

                                            13
                                       Discussion


       Bell contends that its access and operator assistance charges are not subject to

apportionment as “gross receipts from business done in [Texas]” because these activities

do not constitute “service[s] performed in this state. See § 171.1032. Bell also contends

these charges are exempt from apportionment as Texas receipts because they constitute

“receipts from interstate calls” or “revenues from calls in interstate commerce.” See 34

Tex. Admin. Code § 3.549(e)(43); § 3.557(e)(39). Bell next asserts that apportioning its

access and operator assistance charges as Texas receipts violates equal protection

guarantees because Bell does not receive preferential tax treatment received by IXCs and

transportation companies under the Comptroller’s Rules. Finally, Bell contends that the

trial court improperly excluded some of its summary judgment evidence.


       I.     Standard of Review


       When, as here, parties file cross-motions for summary judgment, each party in

support of its motion necessarily takes the position that there is no genuine issue of fact

in the case and that it is entitled to judgment as a matter of law. City of Pflugerville v.

Capital Metropolitan Transp. Authority, 123 S.W.3d 106, 109 (Tex.App.–Austin 2003, pet.

denied). When both parties move for summary judgment on the same issues and the trial

court grants one motion and denies the other, the reviewing court considers the summary

judgment evidence presented by both sides, and determines all questions presented.

Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). See Commissioners

                                            14
Court of Titus County v. Agan, 940 S.W.2d 77, 81 (Tex. 1997). When the trial court’s

order granting summary judgment does not specify the basis for the ruling, we must affirm

summary judgment if any of the summary judgment grounds are meritorious. Western

Investments, Inc. v. Urena, 162 S.W.3d 547, 550 (Tex. 2005).


       Here, the parties rely on statutory provisions and administrative rules to support their

entitlement to summary judgment. In general, matters of statutory construction are

questions of law rather than issues of fact. City of Garland v. Dallas Morning News, 22

S.W.3d 351, 357 (Tex. 2000); Berry v. State Farm Mut. Auto Ins. Co., 9 S.W.3d 884, 890

(Tex.App.–Austin 2000, no pet.). Accordingly, we review the trial court’s decision to grant

summary judgment de novo. Valence Operating Company, 164 S.W.3d at 661.


       II.    Gross Receipts From Business Done In Texas


       Whether Bell’s access and operator assistance charges are subject to

apportionment as “gross receipts from business done in Texas” depends, in part, on

whether they constitute “service[s] performed in this state.” See §§ 171.103, 171.1032.

Accordingly, we must determine whether the term “service” includes providing a customer

access to a communications network for the purpose of completing long distance calls

and/or operator assistance.




                                              15
A.     Statutory Interpretation


       We interpret statutory provisions and administrative rules under traditional principles

of statutory construction. Rodriquez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex.

1999); Gulf Coast Coalition of Cities v. Public Utility Com’n, 161 S.W.3d 706, 712

(Tex.App.–Austin 2005, no pet.). Our primary objective is to ascertain and give effect to

the Legislature’s intent. Tex. Gov’t Code Ann. §§ 312.005 (Vernon 2005). See Texas

Dept. of Protective and Regulatory Services v. Mega Child Care, 145 S.W.3d 170, 176

(Tex. 2004).


       To discern the Legislature’s intent, we begin with the plain and common meaning

of the statute’s words. Tex. Gov’t Code Ann. § 312.003 (Vernon 2005). See Texas Dept.

of Transp. v. City of Sunset Valley, 146 S.W.3d 637, 642 (Tex. 2004). If a statute uses a

term with a particular meaning or assigns a particular meaning to a term, we are bound by

the statutory usage. Texas Dep’t of Transportation v. Needham, 82 S.W.3d 314, 318 (Tex.

2002). If a statute is unambiguous, we must adopt the interpretation supported by its plain

language unless such an interpretation would lead to absurd results. Mega Child Care,

145 S.W.3d at 177. We must also consider the statute as a whole rather than its isolated

provisions. City of Sunset Valley, 146 S.W.3d at 643; City of Canyon v. Fehr, 121 S.W.3d

899, 905 (Tex.App.–Amarillo 2003, no pet.).


       If there is vagueness, ambiguity, or room for policy determinations in a statute or

regulation, we normally defer to the agency’s interpretation unless it is plainly erroneous

                                             16
or inconsistent with the language of the statute, regulation, or rule. Gulf Coast Coalition

of Cities v. Public Utility Com’n, 161 S.W.3d 706, 712 (Tex.App.–Austin 2005, no pet.).

If a statute can be reasonably read as the agency has ruled, and that reading is in harmony

with the rest of the statute, then we are bound to accept the agency’s interpretation even

if other reasonable interpretations exist. Berry, 9 S.W.3d at 893. Moreover, revenue

measures are liberally construed to effectuate their purpose which is to secure the payment

of the taxes levied therein. Isbell v. Gulf Union Oil Co., 147 Tex. 6, 209 S.W.2d 762, 764

(1948); Steakley v. West Tex. Gulf Pipe Line Co., 336 S.W.2d 925, 928

(Tex.Civ.App.–Austin 1960, no writ).


       B.     Service


       The Franchise Tax statutes neither explain nor define the ambiguous phrase,

“business done in Texas”; see Humble Oil & Refining Co. v. Calvert, 414 S.W.2d 172, 180

(Tex. 1967), or the term “service.”      However, regarding telephone companies, the

Comptroller has interpreted the phrase “business within this state” to include “fixed periodic

access and equipment charges for equipment located in Texas whether used for intrastate

or interstate communications”; Comptroller Rule 3.56 (1983) (emphasis added),18 and has

consistently interpreted access charges for the use of local telephone networks and

facilities to be charges for rendering a “service.” See Comptroller Letter Ruling (1989)


       18
         Comptroller of Public Accounts, Star System Accession No. 830R0687A12
(Effective: March 30, 1983). The State Tax Automated Research (STAR) System may be
accessed at: http://www.window.state.tx.us/taxinfo/franchise.

                                             17
(access charges are for intrastate service--for access to the local network);19 Comptroller

Letter Ruling (1992) (payments made in return “for access to local networks or for the use

of local facilities are considered Texas receipts);20 Comptroller Letter Ruling (1998)

(providing facilities for access to complete long distance calls is a service).21 In fact, as

early as 1952, the Attorney General referred to “receipts from loop services and from

charges received . . . for the use of [telephone] lines, equipment or facilities in Texas” as

“services.” Op. Tex. Att’y Gen. No. V-1383, 7 (1952).22 Similarly, the FCC classifies

exchange access as a “service.”23


        Interpretations of the term “service” by the Comptroller comport with its common

meaning; Merriam-Webster’s Collegiate Dictionary 1137 (11th Ed. 2003) (“disposal for




       19
            STAR Accession No. 8901L0929D04 (January 1, 1989).
       20
            STAR Accession No. 9403L1354G06 (March 25, 1994).
       21
            STAR Accession No. 9803494L (March 6, 1998).
       22
        “Although opinions of the Attorney General are merely advisory and not binding
on the courts, they are entitled to careful consideration”; Welmaker v. Cuellar, 37 S.W.3d
550, 552 (Tex.App.–Austin 2001, pet. denied), and are “highly persuasive.” Plainview
Independent School Dist. v. Edmonson Wheat Growers, Inc., 681 S.W.2d 299, 302
(Tex.App.–Amarillo 1984, writ ref’d n.r.e.).
       23
         Bell deposits EUCL revenues in FCC denominated accounts designated as
“network access accounts.” 47 C.F.R. § 49999(i) (1995). “Network Access Accounts”
include “revenues derived from the provision of exchange access services to . . . an end
user of telecommunications services beyond the exchange carrier’s network.” Id.
(emphasis added).

                                             18
use”),24 and the definition adopted by the Texas Legislature regarding access activities

conducted by public utilities such as Bell.25 See Tex. Util. Code Ann. § 51.002(5) (Vernon

2007)(“‘Local exchange telephone service’ means . . . connections between a customer

premises and a long distance provider serving the exchange.”)26 Moreover, the record

reflects that Bell’s corporate representative and director of access regulatory27 testified on

deposition that “[a]ccess is the provision of service generally to carriers for transmission

of voice and data within a LATA.” (emphasis added). He also agreed in deposition that


       24
       “Disposal” means “the power or authority to dispose or make use of as one
chooses.” Merriam-Webster’s Collegiate Dictionary at 361.
       25
            Texas Public Utility Commission defines the term “services,” in pertinent part, as
follows:

       Has its broadest and most inclusive meaning. The term includes any act
       performed, anything supplied, and any facilities used or supplied by a public
       utility in the performance of the utility’s duties . . . to its patrons . . . and the
       public. The term also includes the interchange or facilities between two or
       more public utilities. . . .

26 Tex. Admin. Code § 23.3-5 (2008) (emphasis added), as adopted, 23 Tex. Reg. 9322
(Effective date: September 16, 1998).
       26
          Similar interpretations have been applied by courts in litigation involving Public
Utilities Commission orders; Allcomm Long Distance, Inc., 902 S.W.2d at 664 (access
service involves use of the LEC’s local exchange telephone networks to connect long
distance calls), and tariff litigation. See Southwestern Bell Telephone Co. v. Metro-Link
Telecom, 919 S.W.2d 687, 690 (Tex.App.–Houston [14th Dist.] 1996, writ denied) (use of
local network to provide long distance service termed an access service); AT&T
Communications of the Southwest, 906 S.W.2d at 213 n.6 (Bell’s State Access Service
Tariff included end user access charges).
       27
        As director of access regulatory, Bell’s representative testified that he dealt with
the FCC and various state public service commissions on issues related to “access
services, interstate, and state access services.”

                                                19
all gross receipts at issue in the underlying lawsuit were revenues Bell received as a result

of having regulated rates and providing tariff services.


       Interpreting the term “service” to include operator assistance also comports with its

common meaning; Merriam-Webster’s Collegiate Dictionary at 1137 (to help, use, benefit,

contribution to the welfare of others), as well as the definition supplied by the Texas

Legislature in the area of public utility regulation related to telephone companies. See Tex.

Util. Code Ann. § 55.081 (Vernon 2007).28


       Accordingly, we find that the term “service” includes providing access to a

communications network for the purpose of completing long distance calls and/or operator

assistance.   This definition comports with the Comptroller and Attorney General’s

interpretations, the term’s common meaning and its technical meaning, if any exists, in the

telephone industry.


       The Comptroller’s Franchise Tax Rules provide that “[s]ervice receipts are

apportioned to the location where the service is performed.” 34 Tex. Admin. Code §

3.557(e)(33) (2008). “Where ‘the act is done’ determines the geographical character of

receipts derived from the performance of a service.” Tex. Comp. Pub. Acc’ts Hearing No.



       28
        The term “operator service” is defined as “[a] service using a live operator or
automated operator functions to handle telephone service such as toll calling using collect,
third number billing, and calling card services.” Tex. Util. Code Ann. at § 55.081. The
terms “toll call” and “long distance call” are interchangeable. See Merriam-Webster’s
Collegiate Dictionary at 1315; (“toll: a charge for a long-distance telephone call”).

                                             20
10,028, 180 WL 5466 at *5 (Nov. 27, 1980)(quoting Humble Oil, 414 S.W.2d at 180. And

“receipts from the sale of services must be apportioned to the location of the services.”

Westcott Communications, Inc. v. Strayhorn, 104 S.W.3d 141, 146 (Tex.App.–Austin 2003,

pet. denied).


      The record establishes that the access and operator assistance services underlying

this appeal were requested by Bell’s customers located in Texas who were then serviced

by Bell’s network, facilities, and/or personnel also located in Texas. As such, these

“transactions begin and end in Texas.” See Bullock v. Enserch, 614 S.W.2d 215, 217

(Tex.Civ.App.–Austin 1981, writ ref’d n.r.e.), cert. denied, 455 U.S. 946, 102 S.Ct. 1445,

71 L.Ed.2d 659 (1982). Accordingly, we find as reasonable the Comptroller’s interpretation

that these revenues are from “services performed in this State,” and represent “gross

receipts from business done in Texas.” Nevertheless, this determination does not end our

analysis. We must next determine whether the Comptroller’s Rules exempt Bell’s access

and operator assistance charges from apportionment as “gross receipts from business

done in Texas.” We find that they do not.


      III.      Franchise Tax – Apportionment Exemption


      Although Bell’s access and operator charges are subject to apportionment as “gross

receipts from business done in Texas,” they may be exempt from such apportionment if

they are receipts from “interstate calls” or “revenues from calls in interstate commerce.”

See 34 Tex. Admin. Code § 3.549 (43) (2008); 34 Tex. Admin. Code § 3.557 (39) (1992).

                                            21
Accordingly, we must next determine whether Bell’s access service and operator charges

represent “receipts from interstate calls” or “revenues from calls in interstate commerce.”


       A.     Administrative Rule Interpretation


       It is a long-standing rule that exemptions from taxation are subject to strict

construction because they place a greater burden on other tax-paying businesses and

individuals rather than placing the burden on all taxpayers equally. Cordillera Ranch, Ltd.

v. Kendall County Appraisal Dist., 136 S.W.3d 249, 253-54 (Tex.App.–San Antonio 2004,

no pet.) (citing North Alamo Water Supply Corp. v. Willacy County Appraisal Dist., 804

S.W.2d 894, 899 (Tex. 1991)). As such, tax exemptions are “the antithesis of equality and

uniformity,” Hilltop Village, Inc. v. Kerrville Independent School Dist., 426 S.W.2d 943, 948

(Tex. 1968), and cannot be raised by implication. Bullock v. National Bancshares Corp.,

584 S.W.2d 268, 272 (Tex. 1979), cert. denied 444 U.S. 1016, 100 S.Ct. 667, 62 L.Ed.2d

645 (1980). Exemptions must affirmatively appear and all doubts are resolved in favor of

the taxing authority and against the claimant. Id.


       The burden of proof is on the person claiming the exemption to clearly show that it

comes within the statutory exemption; id; USA Waste Services of Houston, Inc. v.

Strayhorn, 150 S.W.3d 491, 495 (Tex.App.–Austin 2004, no pet.), and, although we are

not bound by the Comptroller’s interpretation, the Comptroller’s administrative

interpretation of ambiguous language in a revenue statute is entitled to our respect and

due weight. Rylander v. Fisher Controls Int’l, 45 S.W.3d 291, 299 (Tex.App.–Austin 2001,

                                             22
no pet.); Quorum Sales, Inc. v. Sharp, 910 S.W.2d 59, 64 (Tex.App.–Austin 1995, writ

denied). Furthermore, an agency’s interpretation of its rule essentially becomes a part of

the rule itself because the agency’s interpretation represents the view of the regulatory

body that drafted and administers the rule. BFI Waste Systems of North America, Inc. v.

Martinez Environmental Group, 93 S.W.3d 570, 575-76 (Tex.App.–Austin 2002, pet.

denied); H.G. Sledge, Inc. v. Prospective Inv. & Trading Co., Ltd., 36 S.W.3d 597, 604

(Tex.App.–Austin 2000, pet. denied).


       B.      Access Service Charges29


       Bell asserts that its revenue from access charges is exempted because the charges

are for “interstate call[s]” or “call[s] in interstate commerce.” Bell contends that its

interpretation is consistent with analogous Texas pipeline cases interpreting the phrase

“business done in Texas” and federal common law interpreting the Commerce Clause, i.e.,

what constitutes interstate commerce. Bell also asserts that providing access for an

interstate, long distance call is inseparable from the call itself because the call is technically

an uninterrupted transmission across state lines and Bell’s local loop is necessary to the




       29
         EUCL and Special Access charges are Network Access Revenues; 47 C.F.R. §
32.4999(i) (2001), “derived from the provision of exchange access services to an
interexchange carrier or to an end user of telecommunications services beyond the
exchange carrier’s network.” Id. As such, both EUCLs and Special Access charges are
subject to the same analysis here.

                                               23
origination and termination of such calls. Accordingly, the validity of Bell’s assertion hinges

upon whether its access service revenue is revenue from interstate calls or commerce.30


       1.     1933-1952 – Early Attorney General Opinions


       Our analysis begins with two Attorney General Opinions both of which address the

issue before us prior to the adoption of the Comptroller’s Rule exempting interstate calls

in 1975. In January 1940, the Attorney General was asked for a determination whether the

gross receipts of domestic telephone companies from interstate calls were subject to the

Texas gross receipts tax. Op. Tex. Att’y Gen. No. O-1878, 1 (1940). The domestic

companies operated wholly within Texas and provided long distance service to their

customers. They transmitted interstate long distance calls over their lines to the Texas

border where their calls were picked up by another company who transmitted the calls to

an out-of-state recipient. The domestic company was paid for the use of their lines within

Texas, and the out-of-state company was paid a commission for completing the call

outside Texas. Id. at 2. In determining that the charges were “interstate” in nature and not

subject to state tax, the Attorney General stated:




       30
        Bell does not challenge the constitutionality of applying the franchise tax to its
access service revenues. The Texas franchise tax is constitutional; Ford Motor Co. v.
Beauchamp, 308 U.S. 331, 334-35, 60 S.Ct. 273, 84 L.Ed. 304 (1939), and states are
permitted to tax telephone calls that originate or terminate within a state. Goldberg v.
Sweet, 252, 264, 109 S.Ct. 582, 102 L.Ed.2d 607 (1989). See Complete Auto Transit, Inc.
v. Brady, 430 U.S. 274, 279-80, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977).

                                              24
        Under the facts here, the “gross receipts” sought to be taxed, were derived
        not from tolls on calls originating and ending within the confines of the State
        of Texas, but rather from tolls on calls originating in Texas and terminating
        in other states, or vice versa, – in other words, in interstate commerce. The
        fact that the telephone company in question receives only such part of the
        tolls as represents payment for the facilities and services furnished by it in
        transmitting the call from or to the borders of the State does not prevent such
        receipts from being stamped with the interstate commerce feature.


Id. at 4.


        In January 1952, the Attorney General was asked for a determination whether the

gross receipts of a domestic telephone company from calls that were routed from points

in Texas through New Mexico and back to Texas were subject to the Texas gross receipts

tax. Op. Tex. Att’y Gen. No. V-1383, 1 (1952). The Attorney General determined that the

calls routed through New Mexico had to be “treated as transactions constituting interstate

commerce”; id. at 5, and opined that the gross receipts tax was inapplicable because the

tax was not apportioned between the interstate and intrastate segments of the call. Id. at

6-7. The 1952 Opinion also indicated that, if there was apportionment, access services

could be subject to a state tax as follows:


        Although the gross receipts derived from the interstate business are not
        subject to this tax, that portion of the receipts representing wholly intrastate
        business which can be separated or segregated from the gross receipts is
        subject to the tax. 51 Am. Jur. 777, 779, 804, Taxation, Secs. 872, 874, 907,
        908. Therefore, the receipts from “loop services” and from charges received
        under contracts or agreements for the use of lines, equipment or facilities in
        Texas are subject to the tax even though such services may be incidental to
        an interstate communication. [citation omitted].



                                              25
See id. (Emphasis added).31


       The defining difference between the two Opinions is that, in the 1940 Opinion, the

Attorney General is describing a service contract that requires transmission between two

states for its completion, and in the 1952 Opinion, the Attorney General is describing a

service contract that is fully performed within Texas. In the 1940 Opinion, the domestic

telephone companies offered interstate long distance service to their customers and

transmitted calls across state lines to complete the long distance service. Op. Tex. Att’y

Gen. No. O-1878, 1 (1940). Because completion of the service owed by the domestic

telephone company was interstate in nature, its revenues were considered derived from

interstate commerce. Id. at 4.


       In the 1952 Opinion, the Attorney General recognized that, although the domestic

telephone company’s calls were interstate transactions, a portion of its receipts would be

taxable as Texas receipts if the state’s tax apportioned the company’s “receipts from ‘loop

services’ and from charges received under contracts or agreements for the use of lines,

equipment or facilities in Texas.” Op. Tex. Att’y Gen. No. V-1383, 6-7 (1952). In the 1952



      31
         See also Memphis Natural Gas Co. v. Stone, 335 U.S. 80, 93, 95-96, 68 S.Ct.
1475, 92 L.Ed. 1832 (1948) (state franchise tax on a gas pipeline company involved in
interstate commerce for local activities such as “maintaining, keeping in repair and
manning facilities used to transport gas upheld as “doing business” in Mississippi); Utah
Power & Light Co. v. Pfost, 286 U.S. 165, 182-83, 52 S.Ct. 548, 76 L.Ed. 1038 (1932) (A
“tax may indirectly and incidentally affect such commerce, just as any taxation of railroad
and telegraph lines does, but this is not a forbidden burden or interference.”)


                                            26
Opinion, the Attorney General did not describe a contract for a service to be delivered in

another state but a contract for the use of facilities and/or equipment located in Texas.


       2.       1972-2000 – Comptroller’s Rules and Policies


       In 1972, the Comptroller adopted an adjudicatory rule that “revenues from interstate

toll charges are not ‘business done in Texas.’” See Comptroller Hearing No. 5587 (1972).32

In Hearing No. 5587, four telephone companies sought a refund of franchise tax payments

determined by apportioning charges from their long distance telephone service as Texas

receipts. All the telephone companies provided both local and long distance service to

their customers. After considering the 1940 and 1952 Opinions and relevant case law, the

Comptroller held that “[r]evenues from interstate toll charges are not ‘business done in

Texas.’” In 1975, the Comptroller adopted a Franchise Tax Rule identical in its import to

the Rule applicable here, i.e., “[r]eceipts of a telephone company in Texas from interstate

calls are not Texas receipts.” Comptroller Rule 3.51 (1976).33 Accord Comptroller Rule

3.403(c)(2) (1979).34




       32
            STAR Accession No. 7208H1005C09 (February 2, 1972).
       33
       Comptroller of Public Accounts, STAR Accession No. 7603R0198E10 (Effective:
March 24, 1976).
       34
        Comptroller of Public Accounts, STAR Accession No. 7905R1012D02 (Effective:
May 1, 1979).

                                            27
       In 1983, the Comptroller adopted a Franchise Tax Rule similar to the 1952 Opinion

as follows: “[b]usiness within this state also includes fixed periodic access and equipment

charges for equipment located in Texas whether used for intrastate or interstate

communications.” See Comptroller Rule 3.56 (1983).35 And, in conformity therewith, the

Comptroller responded to a request by Bell for clarification in 1989 with a Letter Ruling

stating: “access charges [are] for intrastate service, for access to the local network by the

long distance carrier.    These are not charges for interstate service provided by

Southwestern Bell.” Comptroller Letter Ruling (1989).36


       In three successive Letter Rulings, the Comptroller adhered to its policy that access

service charges for use of a telephone company’s local network and facilities were Texas

receipts. Comptroller Letter Ruling (1998); Comptroller Letter Ruling (1994); Comproller




       35
       Comptroller of Public Accounts, STAR Accession No. 830R0687A12 (Effective:
March 30, 1983).
       36
        STAR Accession No. 8901L0929D04 (January 1, 1989). The Comptroller’s Letter
Ruling also indicated that, due to previous correspondence from the Comptroller’s office,
Bell might have been misled as to whether the Comptroller viewed access service charges
as charges for an intrastate or interstate service. The Comptroller made the following
concession:

       Therefore, we will not set up the access charges in Accounts 508 or 509 in
       the audits we have in progress. However, this letter should put you on notice
       that we consider this to be a taxable receipt, and for franchise tax purposes,
       includable in the next tax return due on June 15, 1989.

(emphasis added).

                                             28
Letter Ruling (1992).37 Thus, since the adoption of Franchise Tax Rule 3.56 in 1983, the

Comptroller consistently treated access charges as intrastate services—Texas receipts.


       However, in 2000, the Comptroller differentiated between the apportionment of

access charges paid by IXCs and EUCLs for franchise tax purposes finding that access

charges paid to LECs by IXCs were non-Texas receipts while access charges paid to LECs

by end users, EUCLs, remained Texas receipts. See Tex. Comp. Pub. Acct’s. Hearing No.

35,677 (2000).38 In an earlier unrelated proceeding, Hearing No. 35,677, the Comptroller

determined that, under a literal translation of Rule 3.557(e)(39), access charges paid by

IXCs to LECs were “revenue from an interstate telephone call” because IXCs incurred an

access charge when an actual interstate telephone call was made, i.e., the access charge

was based on the interstate minutes of use of the LEC’s network by the IXC. *19-20. On

the other hand, the Comptroller determined EUCLs paid by end users to LECs were not

“revenue from an interstate telephone call” because LECs billed EUCLs even if no

interstate telephone call was made by or to the customer, i.e., the EUCL was a fixed

charge to all telephone customers to compensate LECs for use of the network to be able

to place and receive interstate telephone calls. *19-20.39


      37
       STAR Accession No. 9803494L (March 6, 1998); STAR Accession No. 9403329L
(March 25, 1994); STAR Accession No. 9203L1230G09 (March 19, 1992).
       38
            STAR Accession No. 200011027H (Nov. 14, 2000).
       39
        Bell contends the Comptroller should have adopted a rule to this effect through
formal rule making rather than using an ad hoc method such as adjudication. See Texas
Ass’n of Long Distance Telephone Companies (TEXALTEL) v. Public Utility Com’n of

                                            29
       Thus, in 1972, the Comptroller initially recognized the policy that revenues from

interstate long distance calls were not “business done in Texas,” and, in 1975, adopted a

conforming franchise tax Rule, i.e., receipts “from interstate calls are not Texas receipts.”

Since 1983, the Comptroller consistently recognized through Rule, Letter Rulings, and

adjudication that EUCLs were not “revenue from an interstate telephone call” but

apportionable under the franchise tax statutes as Texas receipts.40



Texas, 798 S.W.2d 875, 887 (Tex.App.–Austin 1990, writ denied) (an ad hoc rule is “an
agency statement that interprets, implements, or prescribes agency law or policy”). The
Comptroller has discretion to engage in formal rule-making and “the power to enforce state
tax collection statutes due to changes in the constitution or laws of the United States and
judicial interpretations thereof.” § 111.002 (a). Thus, the Comptroller had discretion to
proceed by general rule or by ad hoc adjudication. See City of El Paso v. Public Utility
Com’n of Texas, 883 S.W.2d 179, 188 (Tex. 1994); South Plains Lamesa Railroad, Ltd.
v. High Plains Underground Water, 52 S.W.3d 770, 782 (Tex.App.–Amarillo 2001, no pet.)
(Quinn, J., concurring) (citing Securities and Exch. Comm’n v. Chenery Corp., 332 U.S.
194, 202, 67 S.Ct. 1575, 91 L.Ed. 1995 (1947)). Given the newly created competitive
markets in the telephone industry in the 1980s and 1990s largely due to evolving
technological advances coupled with the creation of new federal and state
telecommunication regulatory regimes charged with balancing competing statutory
objectives, we cannot say the Comptroller abused his discretion here by proceeding on an
ad hoc or “case-by-case” basis. See Southwestern Bell Tel. Co. v. Public Util. Comm’n,
745 S.W.2d 918, 926-27 (Tex.App.–Austin 1988, writ denied). Moreover, the Comptroller’s
policy related to EUCLs does not represent a departure from prior guidance regarding
apportionment of LEC “access charges.” Thus, any possible reliance by Bell on the
Comptroller’s past decisions would not require a different result. This is particularly so
where Bell received guidance by letter in 1989.
       40
         Bell’s contention that an auditor’s inconsistent tax treatment of a telephone
company’s EUCL charges, as evidenced in the Administrative Law Judge’s fact statement
in Hearing No. 35,677, negates the Comptroller’s consistent tax treatment is unpersuasive.
The Comptroller cannot be estopped by the erroneous or negligent acts of its agents or
employees; S&H Marketing Group, Inc. v. Sharp, 951 S.W.2d 265, 266-67
(Tex.App.–Austin 1997, no writ), and a failure to enforce a tax statute or Comptroller policy
or rule does not establish an affirmative policy to the contrary. Sharp v. House of Lloyd,
Inc., 815 S.W.2d 245, 248 (Tex. 1991).

                                             30
       3.     Interstate Commerce – Analogous Texas and Federal Cases


       Analogous case law also supports the proposition originally stated in the 1952

Opinion that underlies the Comptroller’s subsequent Rules, Letter Rulings, and

Adjudicatory Ruling related to EUCLs. That is, where a service contract is for the use of

telephone facilities located in Texas, performance of the contract is intrastate.


       For instance, in Clark v. Atlantic Pipe Line             Co., 134 S.W.2d 322

(Tex.Civ.App.–Austin 1939, writ ref’d), oil shippers contracted directly with Atlantic Pipe

Line (“Atlantic”) to ship oil from locations in Texas and other states to Texas Gulf ports

where the oil was to be loaded onto ocean-going vessels and shipped to other states or

foreign countries. Id. at 324-25. Although recognizing that the phrase “business done in

Texas” was “broad enough to include that segregated portion of interstate business which

is wholly performed within the State,” the court held that Texas could not tax Atlantic’s

proceeds from shipping oil in, or through, Texas because the oil’s shipment would not be

completed until it reached another state or foreign country. Id. at 328. The court held as

follows:


       We hold that the language, “business done in Texas,” as employed in this
       statute was intended to mean business begun and completed in Texas, and
       not business begun in Texas and completed in some other state or foreign
       nation, or vice versa. In other words, that it means intrastate business.


Id.



                                            31
       Thus, Atlantic engaged in “interstate business” by contracting directly with oil

shippers to ship their oil through its pipeline located in Texas to an ocean vessel destined

for delivery in another state or foreign country. Atlantic’s “business” was not providing the

oil shippers with access to, or leasing, its pipeline in order for the oil shippers to ship the

oil themselves. In the first instance, Atlantic is engaged in interstate commerce because

the “business” of shipping the oil is not complete until the oil is delivered in another state

or country. In the second instance, Atlantic would be engaged in intrastate commerce

because the “business” of providing access to, or leasing, facilities in Texas begins and

ends with the facilities in Texas.


       Bullock v. Enserch Exploration, Inc., 614 S.W.2d 215 (Tex.Civ.App.–Austin 1981,

writ ref’d n.r.e.), cert. denied, 455 U.S. 946, 102 S.Ct. 1445, 71 L.Ed.2d 659 (1982), is also

instructive. In Bullock, the “critical issue [was] whether [Enserch’s] sale of natural gas with

deliveries [by pipeline] in Texas to interstate companies for resale outside of Texas

constituted “business done in Texas.” Id. at 216. The court held that the sale of gas by

a Texas gas company to an interstate pipeline company for resale outside of Texas

represented “gross receipts from its business in Texas.” 614 S.W.2d at 217. Enserch had

neither a contract for the sale of gas to an out-of-state purchaser nor a contract to ship gas

produced in Texas out of state. There simply was no interstate component to Enserch’s

business – Texas gas was shipped and sold in Texas.




                                              32
       United States Supreme Court opinions determining what business constitutes

“interstate commerce” are also instructive. See Atlantic Pipe Line Co., 134 S.W.2d at 327.

For instance, in People of State of New York ex rel. Pennsylvania R.R. Co. v. Knight, 192

U.S. 21, 24 S.Ct. 202, 48 L.Ed. 325 (1904), a company operating a ferry located in New

York established a cab stand at the ferry station whose sole business was to bring the

company’s passengers to and from the ferry. 192 U.S. at 22 . Charges for the taxi service

were separate from the company’s charges for further transportation by ferry across state

lines, and no part of the receipts from the cab service were received as compensation for

any service outside the State of New York. Id. The Knight court held that the cab service

was “an independent local service, preliminary or subsequent to any interstate

transportation” constituting intrastate commerce. Id. at 26-28. The Knight court reasoned

as follows:


       As we have seen, the cab service is rendered wholly within the state, and
       has no contractual or necessary relation to interstate transportation. It is
       either preliminary or subsequent thereto. It is independently contracted for,
       and not necessarily connected therewith. But when service is wholly within
       a state, it is presumably subject to state control. The burden is on him who
       asserts that, though actually within, it is legally outside, the state; and unless
       the interstate character is established, locality determines the questions of
       jurisdiction.


Id. at 27.


       Here, like Knight, Bell’s access services are independently contracted for and wholly

performed in Texas. Moreover, because Bell was required to provide network access to


                                              33
all its customers seeking local or long distance service, it was legally prohibited at the time

from engaging in any long distance service or competing with any long distance carrier and

charged its customers EUCLs whether they made or received any long distance calls, its

service did not bear any necessary relation or connection to the provision of any interstate

long distance telephone service. Bell’s network facilities were mere instrumentalities of

commerce whereby Bell exacted a fee for its customers’ use of its lines and switches

located in Texas to complete their long distance telephone business with an IXC. As such,

Bell’s service is intrastate; see Detroit International Bridge Co. v. Corporation Tax Appeal

Board of Michigan, 294 U.S. 83, 85, 55 S.Ct. 332, 79 L.Ed. 777 (1935) (toll bridge is an

“instrumentality which others may use in conducting foreign commerce”); Henderson

Bridge Co. v. Kentucky, 166 U.S. 150, 153-54, 17 S.Ct. 532, 41 L.Ed. 953 (1897),41 i.e.,


       41
            The Henderson court aptly observed:

       Clearly the tax was not a tax on the interstate business carried on over or by
       means of the bridge, because the bridge company did not transact such
       business. The business was carried on by the persons and corporations
       which paid the bridge company tolls for the privilege of using the bridge.

166 U.S. at 154. In Newell Bridge & Railway Company v. Dailey, 451 U.S. 942, 101 S.Ct.
2026, 68 L.Ed.2d 331 (1981), Justices White and Blackmun, dissenting from a denial of
a petition for writ of certiorari, opined that the Supreme Court’s holding in Henderson
Bridge Co. would likely be upheld under the test established in Complete Auto Transit, Inc.
v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977) because the state franchise
tax was apportioned and indicated that, had the tax in Detroit International Bridge been
apportioned, Detroit International Bridge would have been upheld as well. Dailey, 451 U.S.
at 944-45 (White, J., Blackmun, J., dissenting). Thus, contrary to Bell’s assertions, our
analysis is the same regardless whether we apply United States Supreme Court precedent
prior to, or after, adoption of the Complete Auto test for determining whether Texas’s
franchise tax including “access charges” runs afoul of the Commerce Clause. See fn. 32,
supra.

                                              34
Bell’s local service customers and IXCs merely paid Bell for the privilege of using its Texas

facilities so that they, in turn, could engage in interstate commerce. Id.42 Accordingly, we

find as reasonable the Comptroller’s ad hoc rule recognized in the 2000 Hearing and

applied here.


       In addition, where, as here, the Comptroller has adopted an ad hoc rule that has a

retroactive effect, Grocers Supply Company, Inc. v. Sharp, 978 S.W.2d 638, 643-44

(Tex.App.–Austin 1998, pet. denied), “the reviewing court must also determine whether

application of the new policy to a party who relied on the old is so unfair as to be arbitrary

and capricious.” Microcomputer Technology Institute v. Riley, 139 F.3d 1044, 1050 (5th Cir.

1998) (citing 1 K. Davis & R. Pierce, Jr., Administrative Law Treatise § 3.5 at 120 (1994)).



       42
         Telephone service contracts between the subscriber and an LEC, such as Bell, are
analogous to equipment leasing arrangements. See 70 Tex. Jur. 3d Telecommunication
§ 118 (1999) (“The usual contract for telephone service amounts to a lease of certain
instrumentalities to the subscriber in consideration of a prescribed sum each month.”) See
generally Kelly v. Southwestern Bell Telephone Co., 248 S.W. 658, 659 (Tex. Comm’n
App. 1923, judgm’t. adopted). Such contracts are intrastate in nature. See Puget Sound
Stevedoring Co. v. Tax Com’n State of Washington, 302 U.S. 90, 94, 58 S.Ct. 72, 82
L.Ed.2d 68 (1937) (if a company acts as a labor or employment bureau and supplies labor
for the use of a shipowner to load a vessel, it is no part of interstate commerce even
“though transactions of such commerce were increased thereby”); Young & Company of
Houston v. Calvert, 405 S.W.2d 174, 175 (Tex.Civ.App.–Austin 1966, writ ref’d), cert.
denied, 398 U.S. 914, 87 S.Ct. 866, 17 L.Ed.2d 786 (1967) (equipment leasing contracts
for machinery utilized by stevedores to load ocean-going vessels represents an
“independent transaction preparatory to” engaging in foreign commerce–leases are local
transactions). See Atty. Gen. Op. No. C-86 (May 30, 1963) (rental revenue derived from
automobiles, trucks, tow boats, and barges is “gross receipts from business done within
Texas,” regardless whether the vehicles are used by the lessees outside of Texas – to be
interstate, lessors must perform services with respect to the rental equipment outside of
Texas).

                                             35
Because the Comptroller’s ad hoc rule is consistent with the Attorney General’s

longstanding interpretation rendered in the 1952 Opinion, agency policy interpretations

since 1983 and applicable state and federal caselaw, we find the retroactive application

of the ad hoc rule regarding LECs non-exempt status for access charges is not “so unfair

as to be arbitrary and capricious.”


       Bell contends the access charges are “revenues from interstate calls” because an

interstate long distance call cannot originate or terminate without access to Bell’s local loop

and long distance calls are by nature uninterrupted transmissions of an electronic signal.

However, under these circumstances, whether a voice transmission may be uninterrupted

is a distinction without a difference. See Knight, 192 U.S. at 26-28; Bullock, 613 S.W.2d

at 216-17. When state taxation of activities or property within a state is at issue, “[i]t is no

longer a question of actual interruption of the operation of commerce,” and the fact that the

interstate activities could not be conducted without the local activities is not conclusive.

Memphis Natural Gas Co. v. Stone, 335 U.S. 80, 95-96, 68 S.Ct. 1475, 92 L.Ed.2d 1832

(1948). “Rather, a prohibited tax exaction is one beyond the power of the state because

the taxable event is outside its boundaries or for a privilege the state cannot grant.” Id.

Here, the privilege to conduct business in Texas is a privilege Texas can grant and the

taxable event is confined to Texas – payment of a service charge to Bell by a Texas

customer for the use of, or access to, Bell’s facilities located in Texas.




                                              36
       Moreover, the FCC’s interpretation of the nature of the “interconnection” provided

by Bell when granting access to its network also supports this result. As discussed earlier,

during the relevant time period, Bell was required to provide local telephone service and/or

offer local access for long-distance service. See 47 U.S.C. § 153 (2001). This duty

included providing for an “interconnection” between Bell’s network and the “facilities and

equipment” of IXCs. See id. at § 15. The FCC has interpreted the term “interconnection”

to be the “physical linking of two networks for the mutual exchange of traffic.” Competitive

Telecommunications Ass’n v. F.C.C., 117 F.3d 1068, 1071-72 (8th Cir. 1997). See

Southwestern Bell Telephone, L.P. v. Missouri Public Service Com’n, 530 F.3d 676, 684

(8th Cir. 2008). The FCC’s interpretation of the term “interconnection” does not include the

transmission or routing of telephone calls. Competitive Telecommunications Ass’n, 117

F.3d at 1071-72. Thus, Bell offers IXCs access to its telephone exchange service or

facilities “for the purpose of origination and termination of telephone toll service.” 47

U.S.C. § 153(a)(16) (2001) (emphasis added). Although the access service Bell offers to

its local customers may also include the transmission of their calls over its local network

to the IXC’s POP,43 for practical and business purposes, Bell’s transmission ceases when

its service is completed at the IXC’s POP where Bell “interconnects” with the IXC’s long

distance facilities. Thus, the EUCLs and special access charges are local charges for a




       43
         This transmission is extremely limited. Expert testimony in the record indicates
that, before the caller completely dials the long distance number, the call has reached the
IXC’s long distance switch.

                                            37
service that begins at the local customers’ premises and ends at the IXC’s POP in Texas,

i.e., begins and ends in Texas.


       Although the parties acknowledge that an “interstate telephone call is a complete

end-to-end communication that crosses state lines,” Bell’s access service is not a part of

the interstate service provided by the IXC. In a business and practical sense, Bell leases

its network to its customer for the purpose of originating and terminating long distance

calls. Moreover, Bell supplies no more than an “interconnection” at the IXC’s POP and

does not transmit or share in the IXC’s transmission of the call across state lines. Bell’s

access service is completed when its local customer’s call reaches the IXC’s POP, and

again, when Bell’s lines pick up the return signal at the IXC’s POP and transports the signal

to the customer’s premises. As such, Bell’s role is prepatory and incidental to any

interstate commerce being conducted between the IXC and its customer. Although the

telecommunications industry is highly technical, we must not lose sight of the fact that

“taxation is a practical matter, and that what constitutes commerce, manufacture, or

production is to be determined upon practical considerations.” Utah Power & Light Co.,

286 U.S. at 178-79.


       Bell also asserts the access charges are interstate rather than intrastate because

access charges are federally tariffed charges created under the auspices of the FCC.

However, there is no federal mandate giving the FCC exclusive jurisdiction over the

regulation or taxation of telecommunications companies.         Simply because the FCC


                                             38
regulates telephone companies does not mean that the regulated activities are solely, or

necessarily, interstate. Congress may regulate purely intrastate telephone activity to

protect interstate commerce. See United States v. Lopez, 514 U.S. 549, 558, 115 S.Ct.

1624, 131 L.Ed.2d 626 (1995); United States v. Gilbert, 181 F.3d 152, 158 (1st Cir. 1999)

(discussing the “long standing” line of cases holding Congress may regulate purely

intrastate telephone activity under the Commerce Clause).           Moreover, the Federal

Telecommunications Act of 1996 disclaims authority over state taxation. 110 Stat. 56, 144

(“nothing in this Act . . . shall be construed to modify, impair, or supersede . . . any State

or local law pertaining to taxation”). “Federal regulation does not preclude state taxation

and state taxation does not preclude federal regulation.” Polish Nat. Alliance of United

States v. N.L.R.B., 322 U.S. 643, 649, 64 S.Ct. 1196, 88 L.Ed. 1509 (1944). Thus, we

decline to disturb the Comptroller’s determination that, while the FCC’s regulation and

classification of access charges is informative, it is not determinative. See Comp. Pub.

Acct’s Hearing No. 35,677, *20 (2000).44


       C.       Operator Assistance Service Charges


       Bell also asserts that its revenues from operator assistance charges are revenues

from “interstate calls” or “calls in interstate commerce.” These services primarily involve

directory assistance, busy interrupt, and zero transfer operator assistance. As described

by Bell’s corporate representative on deposition, these “miscellaneous services [are]


       44
            STAR Accession No. 200011027H (Nov. 14, 2000).

                                             39
associated with [a customer] trying to make or place an interstate call.” They are pay-per-

use charges for the use of Bell’s facilities and personnel located in Texas. As such, these

service charges do not represent revenue from a “call,” either intrastate or interstate.


       Bell urges this Court to adopt a rule whereby its access service and operator

assistance receipts would be excluded from apportionment as Texas receipts so long as

they enable customers to make “interstate calls” or “calls in interstate commerce.”45 Bell’s

proposed rule would require an amendment to the Comptroller’s Rule and eviscerate the

existing exemptions – “receipts that enable interstate calls” is a far more expansive

exemption than “receipts from interstate calls.” Bell has failed to meet its burden of proof

in establishing that these access and operator assistance charges are exempt from

apportionment as Texas receipts.


       Accordingly, Bell’s first issue is overruled.


       IV.    Equal Protection


       Bell argues that apportioning its access and operator assistance charges as Texas

receipts for franchise tax purposes violates the Equal Protection Clause of the United

States Constitution. U.S. Const. amend. XIV.46 Bell asserts that, although it is similarly


       45
         “Enable” is defined as “to provide with the means or opportunity; to make possible,
practical, or easy.” Merriam-Webster’s Collegiate Dictionary at 409.
       46
        The requirements for equal protection under the United State Constitution and the
Texas Constitution are substantially the same. Rylander v. 3 Beall Bros., 3, Inc., 2 S.W.3d
562, 567 (Tex.App.–Austin 1999, no pet.). See Tex. Const. art. VIII, § 1.

                                              40
situated, IXCs and transportation companies receive preferential treatment because their

receipts from intrastate “legs” of interstate telephone service and/or transportation are not

apportioned as Texas receipts.47 Bell also contends that LECs are similar to IXCs because

they both participate in the transmission of an interstate phone call utilizing like equipment

and facilities located in Texas.


       Although states generally have broad powers to impose and collect taxes,

classifications among taxpayers may not be arbitrary, unreasonable, or capricious. See

Hurt v. Cooper, 130 Tex. 433, 110 S.W.2d 896, 901 (1937); Upjohn Co. v. Rylander, 38

S.W.3d 600, 609 (Tex.App.–Austin 2000, pet. denied). Although all persons falling within

the same class must be taxed alike, a classification will not be found deficient unless it has

no rational basis. Upjohn, 38 S.W.3d at 609.


       Despite that LECs and IXCs may utilize similar equipment and facilities to transmit

telephone calls, Bell has failed to establish the lack of any rational basis for distinguishing

between LECs and IXCs for tax purposes. The business activities of LECs and IXCs are

dissimilar because each operates in separate and distinct areas. LECs charge local



       47
         An IXC’s revenue from interstate, long distance services is clearly exempt from
apportionment as a Texas receipt under franchise tax rules. For purposes of apportioning
earned surplus under the franchise tax, transportation companies must “report Texas
receipts from transportation services in intrastate commerce.” 34 Tex. Admin. Code §
3.557(d)(41) (1992). For purposes of apportioning taxable capital under the franchise tax,
transportation companies must report Texas receipts from transportation services by
“including receipts derived from the transportation of goods or passengers in intrastate
commerce.” 34 Tex. Admin. Code § 3.549 (1998).

                                              41
customers and IXCs for access to, or use of, its intrastate facilities and equipment to

transmit the call from the customer’s premises to an IXC’s POP. Once the call reaches the

IXC’s POP, the IXC then utilizes its facilities and equipment to transmit its customer’s call

out of state. The customer contracts with the LEC for local service and access service to

complete long distance calls and independently contracts with an IXC for long distance

service. That Bell provides a different service than the IXC and Bell’s service is intrastate

rather than interstate establishes rational bases for distinguishing an LEC such as Bell from

IXCs for franchise tax classification purposes. See Westcott Communications, Inc., 104

S.W.3d 141, 150 (Tex.App.–Austin 2003, pet. denied). Moreover, an LEC cannot engage

in the service supplied by the IXC. Because Bell was permitted to maintain its monopoly

on “local” telephone service, it was legally prohibited from providing any interstate long

distance service to its local customers.


       Regarding transportation companies, the differences are even more striking. Not

only do the two industries offer different services that neither can engage in on their own,

they do not utilize similar equipment or facilities. Moreover, that telephone services may

be analogous to transportation services in the abstract is an insufficient basis for

contending there is no rational basis for differing tax classifications. See Westcott, 104

S.W.3d at 150.48


       48
        Bell attempts to draw an analogy between EUCLs and charges by transportation
companies shipping interstate when there is an intrastate leg involved with the interstate
shipment. Such an analogy fails, however, because Bell is not involved in interstate
“business,” i.e., an EUCL is a service charge for access to its equipment and facilities

                                             42
       To the extent Bell contends it is treated differently from IXCs because these services

are classified by the Comptroller as intrastate rather than interstate, we have already

addressed the issue. Accordingly, Bell has failed to establish that the Comptroller makes

an arbitrary and unreasonable distinction between these taxpayers and issue two is also

overruled.


       V.     Summary Judgment Evidence


       Bell contends the trial court improperly excluded non-expert testimony in the

summary judgment proceedings below. While Bell notes the Comptroller objected to

“selected testimony” of two witnesses, Bell does not identify the specific testimony

improperly excluded by the trial court and states, “[t]he trial court improperly sustained

some of these objections.” Bell did not file a written response to the Comptroller’s

objections nor move for reconsideration of the trial court’s decision to sustain the

Comptroller’s objections to the affidavits of the two witnesses.


       An appellant bears the burden of bringing forth a record that demonstrates the trial

court abused its discretion when it sustained an appellee’s objections to the summary

judgment evidence. Cantu v. Horany, 195 S.W.3d 867, 871 (Tex.App.–Dallas 2006, no

pet.) Where the record fails to show that a party objected to the trial court’s ruling




located in Texas. As stated earlier, there is simply no interstate component to the service
Bell is offering.

                                             43
sustaining an opponent’s objection to his or her summary judgment evidence, the party has

not preserved the right to complain on appeal about the trial court’s ruling. Id.


       Because Bell objects to “some” but not all of the possible grounds for the trial court’s

ruling that sustained the objection, Bell has waived the issue. See Malone v. Foster, 956

S.W.2d 573, 579 (Tex.App.–Dallas 1997), aff’d, 977 S.W.2d 562 (1998). Moreover, there

is nothing in the record to show that Bell filed a written response to the Comptroller’s

written Objections to Plaintiff’s Summary Judgment Evidence nor filed a motion for

reconsideration of the trial court’s order sustaining the Comptroller’s objections. Neither

were Bell’s issues preserved. Bell’s third issue is also overruled.


                                       CONCLUSION


       Having overruled Southwestern Bell Telephone Company’s issues, the trial court’s

judgment is affirmed.



                                                   Patrick A. Pirtle
                                                       Justice


Quinn, C.J., concurring.




                                              44
