On January 6, 2017, the Texas Third Court of Appeals (the “Court”) withdrew their opinion and judgment in American Multi-Cinema, Inc. v. Hegar from April 30, 2015 to substitute a revised opinion (No. 03-14-00397-CV (Tex. App.—Austin January 6, 2017, no pet. h.) (mem. op.)). The revised opinion upholds American Multi-Cinema, Inc.’s (“AMC’s”) cost of goods sold (“COGS”) deduction for its film exhibition costs while leaving unresolved whether AMC’s products are “perceptible to the senses” and thus qualify as “tangible personal property” under Texas Tax Code Section 171.1012(a)(3)(A)(i).
In its original opinion on April 30, 2015, the Court held that a movie theater company, AMC, could claim a COGS deduction for movies exhibited in its theaters. Specifically, the Court found that AMC could include its exhibition costs in its COGS deduction. The Court examined the definition of “tangible personal property” under Section 171.1012(a)(3)(A)(i). The Court noted that the section defines “tangible personal property” broadly to mean “personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner.” The Court found AMC’s products met the plain language definition of “tangible personal property” because the evidence showed that AMC’s film products are both visible to sight and audible to sound and consumable creative content. Therefore, AMC was entitled to include its exhibition costs in its COGS deduction. In response to the holding, the Texas Comptroller issued an article complaining that “because the movie is perceptible to the eye and ear, then virtually anything ‘perceptible to the senses’ may qualify as [tangible personal property], effectively rendering the term meaningless.”
In its revised opinion on January 6, 2017, the Court found that AMC’s products still fall within the definition of “tangible personal property” but narrowed the potentially expansive reach of the of the original opinion by relying on the definition from Section 171.1012(a)(3)(A)(ii) rather than the “perceptible to the senses” definition from Section 171.1012(a)(3)(A)(i) (discussed in the previous paragraph). The alternative definition under Section 171.1012(a)(3)(A)(ii) defines “tangible personal property” as “films . . . without regard to the means or methods of distribution or the medium in which the property is embodied.”
In its revised opinion, the Court determined that AMC could include its film exhibition costs in its COGS deduction if its products meet at least one of the definitions of “tangible personal property” under Section 171.1012(a)(3)(A). The Court found the evidence presented clearly reflected AMC’s products meet the definition under (ii) because it distributes films to its customers via film exhibition. Because the Court determined this finding was decisive, it expressly did not resolve the issue from the original opinion as to whether AMC’s products are “perceptible to the senses” and qualify under Section 171.1012(a)(3)(A)(i). In the wake of the original opinion many taxpayers were left wondering whether they, like AMC, could claim a COGS deduction because they too arguably acquire/produce and sell products that are perceptible to the senses. For those taxpayers, this issue remains unresolved as the Court in its revised opinion leaves open the question of what can qualify as tangible personal property for purposes of the COGS deduction. Note that this decision is not yet final and is potentially subject to review by the Texas Supreme Court.
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