
TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN




NO. 03-98-00399-CV


Nabisco, Inc., and Planters/Lifesavers Company, Appellants

v.


Carole Keeton Rylander, Comptroller of Public Accounts of the State of Texas; and
John Cornyn, Attorney General of the State of Texas, Appellees





FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT

NO. 97-08295, HONORABLE F. SCOTT McCOWN, JUDGE PRESIDING






	Appellants Nabisco, Inc., and Planters/Lifesavers Company ("Planters") (1) filed suit
after the Texas Comptroller of Public Accounts (the "Comptroller") refused to refund franchise
taxes for which appellants claimed a deduction under section 171.104(1) of the franchise tax
statute.  See Tex. Tax Code Ann. § 171.104(1) (West 1992).  Appellants sought a refund for their
denied deduction as well as a declaratory judgment that the Comptroller's rule interpreting section
171.104(1) is contrary to the franchise tax statute.  Following a bench trial, the trial court held that
the Comptroller's rule is not contrary to the statute and that appellants are not entitled to a refund. 
Nabisco and Planters raise three issues for review challenging the final judgment rendered by the
trial court in favor of appellees, the Comptroller and the Attorney General of Texas. (2) We will
affirm.


FACTUAL AND PROCEDURAL BACKGROUND

	Nabisco and Planters manufacture and sell snacks, cookies, and other food products
in Texas and elsewhere.  Most of their products sold in this state are manufactured out of state and
then shipped to Texas distribution facilities.  Nabisco has two manufacturing sites in Texas:  a
Biscuit Division in Houston and a Refrigerated Division in Denison.  Planters has no
manufacturing sites in Texas.  The Nabisco and Planters sales at issue involve food products
shipped from manufacturing sites outside of Texas and stored in Texas distribution centers while
appellants await orders from Texas buyers.
	Texas buyers such as H.E.B. and Wal-Mart order products from appellants' Texas
facilities.  Orders are transmitted to and processed by the companies' Texas employees at their
Texas facilities.  They take products out of Texas inventory, load them onto trucks, and deliver
them to Texas buyers.
	Nabisco and Planters paid Texas franchise taxes based on apportioned net taxable
capital, which is apportioned net assets plus stated capital. (3)  Tex. Tax Code Ann. §§ 171.002, .101
(West 1992).  The tax base is calculated by multiplying against a total taxable capital a fraction
representing the percentage of Texas business done by a multi-state taxpayer.  Id. § 171.101(a)(2). 
This fraction is known as an "apportionment formula" because it apportions a multi-state
corporation's tax base into the amount taxable by Texas and the amount taxable by other
jurisdictions.  See, e.g., General Dynamics v. Sharp, 919 S.W.2d 861, 863-64 (Tex.
App.--Austin 1996, writ denied) (affirming constitutionality of single-factor apportionment
formula that apportions Texas franchise tax base).
	The numerator of the Texas formula consists of gross receipts (4) from Texas
business, while the denominator consists of gross receipts from all of the corporation's business. 
Tex. Tax Code Ann. §§ 171.103, .105, .112 (West 1992); see also Bullock v. Nat'l Bancshares
Corp., 584 S.W.2d 268, 270 (Tex. 1989) (describing operation of Texas apportionment formula). 
After apportioned taxable capital is computed by multiplying the Texas formula against the total
tax base, the tax rate is multiplied against apportioned taxable capital to calculate the franchise
tax. (5)  Tex. Tax Code Ann. § 171.002.
	The effect of these laws is that a company's net taxable capital increases as its Texas
business increases, and decreases as its Texas business decreases.  According to the Comptroller's
audits, Nabisco's Texas business averaged 5.5% of its total business, and Planters' 6.3%. 
Treating sales of goods first shipped to a Texas distribution center as out-of-state business would
significantly diminish each company's "Texas business," depriving the State of more than $3
million in franchise tax and interest.
	Appellants argue that the receipts from the sales at issue are out-of-state business
and therefore exempt under section 171.104(1) of the Tax Code.  Tex. Tax Code Ann.
§ 171.104(1).  In order for section 171.104(1) to apply, however, the receipts must first be
includable under section 171.103.  That section provides:

In apportioning taxable capital, 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 taxation . . . . 


Id. § 171.103(1) (West 1992 & Supp. 1999) (emphasis added).  Section 171.104 provides:


	A corporation may deduct from its receipts includable under Section
171.103(1) of this code the amount of the corporation's receipts from sales of the
following items, if the items are shipped from outside this state and the receipts
would be includable under Section 171.103(1) of this code in the absence of this
section: 

(1)	food that is exempted from the Limited Sales, Excise, and Use Tax Act by
Section 151.314(a) of this code . . . . 


Tex. Tax Code Ann. § 171.104(1) (emphasis added).
	The Comptroller relies on Rule 3.549(e)(20) to limit the applicability of the
franchise tax exemption under section 171.104(1).  See 34 Tex. Admin. Code § 3.549(e)(20)
(West 1992).  According to section 3.549(e)(20), deductions from Texas receipts for sales of food
exempted from the sales and use tax by sections 151.313 and 151.314 (6) are only allowed for the
initial sale of items shipped from a location outside of Texas directly to a purchaser in Texas;
there is no exemption when the items are shipped from outside Texas to an outlet or storage
facility before being sold.  See id.; Tex. Tax Code Ann. §§ 151.313, .314 (West 1992).
	At issue in three report years are Nabisco's gross receipts from Texas sales totaling
$205,291,266 in year one, $255,334,716 in year two, and $238,613,423 in year three.  These
amounts represent sales of food products manufactured outside of Texas, shipped to storage
facilities in Texas, and later sold to Texas buyers.  Nabisco seeks to have these gross receipts
deducted from its total Texas gross receipts under section 171.104(1). (7)  During the same report
years, Planters had total gross receipts from Texas sales in the amounts of $71,655,608,
$66,096,307, and $42,745,039.  Because all of these sales involved food products shipped from
out of state to a Texas warehouse to await a sale to Texas customers, the Comptroller denied any
deduction from these gross receipts.
	In 1994, Nabisco and Planters filed Petitions for Redetermination and a Claim for
Refund with the Comptroller seeking tax refunds plus interest for report years 1989 through 1992
for Nabisco and 1989 through 1991 for Planters. (8)  Both appellants claim that they fall under the
exemption from the Texas franchise tax provided by section 171.104(1).  Tex. Tax Code Ann.
§ 171.104(1).  Appellants sought the following:  (1) a franchise tax refund in the amount of
$2,155,572 on behalf of Nabisco, (2) a franchise tax refund in the amount of $1,009,239 on behalf
of Planters, and (3) a franchise tax protest payment in the amount of $42,472.06 on behalf of
Planters, plus interest on those amounts.  The Comptroller, relying on section 171.104(1), denied
both petitions.  Appellants then filed suit in district court disputing the Comptroller's interpretation
of section 171.104(1).  The trial court held that section 171.104(1) permits franchise taxpayers to
deduct sales of "qualified food products" (9) when the products have been shipped and sold from out
of state to Texas buyers and that Nabisco and Planters are not entitled to such deduction.  Nabisco
and Planters bring this appeal challenging the Comptroller's interpretation of section 171.104(1)
and claiming they are entitled to a refund plus interest for the franchise taxes they paid for the
report years in issue.
 Nabisco and Planters bring three issues for review:  (1) whether their gross receipts
from the sales in issue qualify for a franchise tax exemption under section 171.104(1); (2) whether
section 171.104(1) is so clear and unambiguous that the Comptroller has no discretion to interpret
it; and (3) whether the Comptroller's Rule 3.549(e)(20) interpreting section 171.104(1) is contrary
to legislative intent or to the franchise tax statute.  All issues assert that the trial court erred in
rendering judgment for the Comptroller and deferring to the Comptroller's interpretation of section
171.104(1).

DISCUSSION
	In a case involving agency decision-making, we apply a deferential standard of
review.  See Stanford v. Butler, 181 S.W.2d 269, 273 (Tex. 1944); ADP Credit Corp. v. Sharp,
921 S.W.2d 490, 493 (Tex. App.--Austin 1996, writ denied).  For an agency charged with
enforcement of a statute, we give serious consideration to the agency's construction of that statute,
so long as the interpretation is reasonable and does not contradict the statute's plain language. See
Stanford, 181 S.W.2d at 273; Texas Citrus Exch. v. Sharp, 955 S.W.2d 164, 168 (Tex.
App.--Austin 1997, no writ).
	In interpreting section 171.104(1), the parties agree that the statute requires the
following to invoke the interstate sales exemption:  (1) a shipment of food products exempt from
sales tax; (2) from out of state; (3) to a Texas buyer; (4) in a sales transaction; (5) that generates
Texas gross receipts.  See Tex. Tax Code Ann. §§ 171.103(1), .104(1); 34 Tex. Admin. Code
§ 3.549(e)(20).  However, the parties disagree on when the actual sales transaction must occur. 
Nabisco and Planters contend that sale and shipment of products from out of state to a Texas buyer
need not occur simultaneously, while the Comptroller insists that they must.  The Comptroller's
rule requires section 171.104(1) sales to be made "directly" to a Texas buyer.  See 34 Tex.
Admin. Code § 3.549(e)(20).  The parties dispute the amount of deference this Court should give
to the Comptroller's rule and its interpretation of section 171.104(1).  Nabisco and Planters argue
that the Comptroller's rule is contrary to the purpose of the franchise tax statute which grants a
deduction for all products that originate from out of state.
	Section 171.104 does not specify the timing of the sale; (10) therefore, it is ambiguous
in that respect.  Because of the ambiguity in section 171.104(1) and because of the Comptroller's
duty to enforce the franchise tax statute, (11) we will defer to the Comptroller's interpretation of the
statute if it is reasonable.  See Texas Citrus Exch., 955 S.W.2d at 168.  The Comptroller argues
that her restriction of the tax exemption to interstate sales and not to Texas-based sales is
reasonable and correct because it:  (1) is consistent with statutory history and purposes; (2) gives
effect to each word of the statute; (3) has been legislatively accepted for twenty-eight years; and
(4) maintains a level playing field for Texas and out of state manufacturers.  See Tex. Tax Code
Ann. § 171.401 (West 1992); Tex. Gov't Code Ann. § 403.011 (West 1998).  We agree that the
Comptroller's interpretation is reasonable.
	Section 171.104(1) allows a company to deduct receipts from the sale of food
products that are shipped from outside of the state if the receipts are includable under section
171.103(1).  See Tex. Tax Code Ann. §§ 171.104(1), .103(1).  Section 171.103(1) expressly
states that receipts from business done in this state include the sale of food products if the products
are delivered to a Texas buyer.  See Tex. Tax Code Ann. § 171.103(1).  The Comptroller's rule
interpreting 171.104(1) clarifies when the receipts from a sale of food products are entitled to
section 171.104's exemption in light of section 171.103.  34 Tex. Admin. Code § 3.549(e)(20). 
The Comptroller's rule deems receipts deductible only if they are shipped from outside of this state
and delivered directly to the buyer.  This rule does not contradict the language in 171.104 in light
of 171.103.  The statutory predecessor of these sections, article 12.02, (12) adds further credence to
the Comptroller's interpretation.
	Article 12.02 is relevant for construing the exemption in section 171.104(1) as it
exists today.  See Tex. Rev. Civ. Stat. Ann. art. 12.02(1) (West 1988); 34 Tex. Admin. Code
§ 3.549(e)(20).  When the legislature codified article 12.02, it is presumed to have known and
adopted the agency's "interpretation placed on the original act and intended the new enactment to
receive the same construction."  First Employees Ins. Co. v. Skinner, 646 S.W.2d 170, 172 (Tex.
1983).
	Before the codification of article 12.02, Texas courts conformed to early twentieth-century federal Commerce Clause jurisprudence by holding that Texas receipts were limited to
receipts from Texas-based sales.  See, e.g., Flowers v. Pan Am. Ref. Corp., 154 S.W.2d 982, 984
(Tex. Civ. App.--Austin 1941, writ ref'd).  The Commerce Clause continued to prohibit states
from taxing interstate sales until the 1940s when federal constitutional law began to grant states
more authority to tax out-of-state companies doing business within their borders.  In these cases,
the United States Supreme Court articulated a four-part test which provides that a state's tax does
not violate the Commerce Clause if it:  (1) "is applied to an activity with a substantial nexus with
the taxing state"; (2) "is fairly apportioned"; (3) "does not discriminate against interstate
commerce"; and (4) "is fairly related to the services provided by the state."  See Japan Line Ltd.
v. County of Los Angeles, 441 U.S. 434, 444-45 (1979); Complete Auto Transit, Inc. v. Brady,
430 U.S. 274, 279 (1977); Sharp v. House of Lloyd, 815 S.W.2d 245, 248-49 (Tex. 1991);
Aransas County Appraisal Review Bd. v. Texas Gulf Shrimp Co., 707 S.W.2d 186, 191 (Tex.
App.--Corpus Christi 1986, writ ref'd n.r.e.).  States could choose to tax formerly tax-exempt
interstate transactions at either their point of origin or their destination.  In 1969, the Texas
Legislature enacted article 12.02 to amend the franchise tax statute to include receipts from
interstate sales.  Out-of-state companies that sold products from out-of-state locations to Texas
buyers lost their substantial tax advantage.  Texas sellers, on the other hand, gained tax equality. 
Receipts from Texas-based sales have always been included in Texas receipts; changing the
taxability of interstate sales did not affect the taxability of Texas-based sales.
	The Comptroller's construction of section 171.104(1) was embodied in earlier
versions of the rule at issue here.  Under the 1987 version, Rule 3.402, the exemption applied only
when the shipment of products from out of state occurred simultaneously with their sale:

(c)(29)	Deductions from Texas receipts for sales of . . . food exempted from
sales and use tax . . . will be allowed only for the sale of items shipped
from a location outside Texas directly to a purchaser in Texas.

	(A)	No deduction from Texas receipts is allowed if the items are
subsequently resold.

	(B)	The deduction does not apply when the manufacturer ships the items
from outside Texas to an outlet or storage facility in Texas and later
sells them.


34 Tex. Admin. Code § 3.402(c)(29) (West 1987) (emphasis added).  Rule 3.402(c)(29) is the
predecessor of the current rule, Rule 3.549(e)(20).  This construction of when a sale and shipment
must occur may be deemed to have been legislatively accepted when the legislature codified article
12.02 in 1982. (13) See House of Lloyd, 815 S.W.2d at 247 (reaffirming the legislative acceptance
doctrine in Humble Oil & Refining Co. v. Calvert, 414 S.W.2d 172, 180 (Tex. 1967)).
	The Comptroller's rule at issue deems appellants' sales to be Texas-based sales, not
interstate sales, because appellants ship products from out of state to their Texas facilities before
selling them to Texas buyers.  This rule interpreting section 171.104(1) is reasonable; we therefore
affirm the trial court's judgment denying a tax refund to Nabisco and Planters.

CONCLUSION
	Section 171.104(1), which allows a corporation to deduct section 171.103 receipts
from Texas sales of food products shipped from out of state, is ambiguous with respect to when
the sale of those items must occur.  The Comptroller's rule that the sale and shipment of these
products must occur simultaneously is a reasonable and long-standing interpretation of section
171.104 that does not contradict the plain language of the statute.  This interpretation is also
supported by the history and purpose of the interstate sales exemption.  Because the Comptroller
is charged with enforcement of the franchise tax statute and has issued a reasonable rule to address
an ambiguity, we defer to the Comptroller's interpretation.  Therefore, we affirm the trial court's
judgment upholding the Comptroller's decision to deny a franchise tax refund to appellants.


  
				Bea Ann Smith, Justice
Before Justices Jones, B. A. Smith and Yeakel
Affirmed
Filed:   May 6, 1999
Publish
1.        Nabisco is a Delaware corporation legally authorized to do business in Texas.  Planters was
a Delaware corporation before becoming a division of Nabisco in 1991, and is also legally
authorized to do business in Texas.
2.      	Nabisco and Planters sued John Sharp, the Texas Comptroller of Public Accounts, and Dan
Morales, the Attorney General of Texas, in their official capacities.  Since this appeal was filed,
Carole Keeton Rylander has replaced John Sharp as the Texas Comptroller, and John Cornyn has
replaced Dan Morales as Attorney General. See Tex. R. App. P. 7.2(a).
3.      	The franchise tax statute defines "stated capital" by incorporating the Texas Business
Corporation Act.  Tex. Tax Code Ann. § 171.101(a)(1) (West 1992).
4.      	For determining taxable capital, "gross receipts" means all revenues that would be
recognized annually under a generally accepted accounting method, without deduction for the cost
of property sold, materials used, labor performed, or other costs incurred.  Tex. Tax Code Ann.
§ 171.112(a) (West 1992).
5.      	The franchise tax formula can be re-stated as follows:  (a) Texas gross receipts ÷ total
gross receipts = percentage of Texas business; and (b) taxable capital × percentage of Texas
business = net taxable capital × tax rate = franchise tax.
6.      	Neither party disputes the fact that appellants' food products such as biscuits and cookies
are exempt from tax under section 151.314 of the Tax Code.  Tex. Tax Code Ann. § 151.314
(West 1992).
7.      	When Nabisco shipped food products directly to Texas buyers from an out-of-state
manufacturer, the Comptroller granted the deduction from the franchise tax.
8.      	According to the Findings of Fact and Conclusions of Law from the trial court, the report
years in issue for both Nabisco and Planters cover three years, but the court record cites to report
years 1989 through 1991 for Planters and 1989 through 1992 for Nabisco.
9.      	Section 151.314 of the Tax Code lists what food products qualify for exemption status. 
Tex. Tax Code Ann. § 151.314 (West 1992).  Neither party disputes the issue of what food
products qualify under section 151.314.
10.      	The definition of "sale" under section 151.005 of the Tax Code is as follows: 

"Sale" or "purchase" means any of the following when done or performed for
consideration:

(1)	a transfer of title or possession of tangible personal property;

(2)	the exchange, barter, lease, or rental of tangible personal property;

(3)	the performance of a taxable service . . . 

 . . . 

(8)	a transfer of title or possession of tangible personal property that has been
produced, fabricated, or printed to the special order of the customer.

Tex. Tax Code Ann. § 151.005 (West 1992).  Broadly speaking, a "sale" is the transfer of
tangible personal property, for consideration, between or among separate entities.  The timing of
a sale would be governed by relevant case law and statutes, such as, but not limited to, the
Uniform Commercial Code.
11.      	See Tex. Tax Code Ann. § 171.401 (West 1992); Tex. Gov't Code Ann. § 403.011 (West
1998).
12.        The 1969 amendment in issue, article 12.02, was codified in 1982 under the statutory
revision program as sections 171.103 and 171.104(1) of the Tax Code.  See Act of June 10, 1981,
67th Leg., R.S., ch. 389, § 1, 1981 Tex. Gen. Laws 1697, 1697-98 (effective Jan. 1, 1982).
13.      	The state's statutory revision program is a topic-by-topic revision of the state's general and
permanent statutes without substantive change.  In carrying out this revision program, the 
legislature intended for neither the sense, meaning, nor effect of any legislative act to be
substantively altered.  See Tex. Tax Code Ann. § 101.001 (West 1992); Act of May 21, 1963,
58th Leg., R.S., ch. 448, § 1, 1963 Tex. Gen. Laws 1152.


s" means all revenues that would be
recognized annually under a generally accepted accounting method, without deduction for the cost
of property sold, materials used, labor performed, or other costs incurred.  Tex. Tax Code Ann.
§ 171.112(a) (West 1992).
5.      	The franchise tax formula can be re-stated as follows:  (a) Texas gross receipts ÷ total
gross receipts = percentage of Texas business; and (b) taxable capital ×