The Fifteenth Court of Appeals' Recent Decision Involving American Airlines, Inc. Creates Potential Refund Opportunities for Companies Engaged in Airline Transportation

A recent decision from the 15th Court of Appeals in Texas could provide a windfall for entities engaged in providing airline transportation services. In a case involving American Airlines, Inc. (“American Airlines”), the 15th Court of Appeals held that the Texas franchise tax, as applied to American Airlines, is preempted by federal law. While the case may still be appealed to the Texas Supreme Court, the decision creates the potential for refund claims.

American Airlines is a company that needs no introduction to most people as it is often regarded as the largest airline in the world with its headquarters in Fort Worth, Texas. It initially filed a Texas franchise tax report for the 2014 report year under protest claiming that the Texas franchise tax was preempted by the Anti-Head Tax Act (“AHTA”).[1] As noted by the court, the AHTA is a federal law that prohibits a state from levying or collecting “‘a tax, fee, head charge, or other charge on … the gross receipts from’ air commerce or transportation.”[2] The Texas Comptroller thereafter sought an opinion from the U.S. Department of Transportation (“DOT”) that the AHTA did not preempt the Texas franchise tax.[3] The DOT disagreed with the Texas Comptroller after which the Texas Comptroller refunded American Airlines the franchise tax it paid for report year 2014.[4]

American Airlines separately filed a Texas franchise tax report for the 2015 Report Year in which it reported and paid Texas franchise tax under protest on $1 billion in baggage fee revenue.[5] Afterwards, American Airlines requested a refund of that tax on the same basis in the amount of $107,577.04.[6] The Texas Comptroller counterclaimed seeking to recover $1.8 million in additional Texas franchise tax claiming that American Airlines could not exclude its revenue from passenger tickets and freight transportation.[7]

The district court ruled in favor of American Airlines holding that, as applied to American Airlines, the Texas franchise tax was effectively a gross receipts tax because American Airlines was not allowed any deductions or exclusions from its revenue since it would pay tax on 70% of total revenue.[8] Thus, the district court concluded that the Texas franchise tax amounts to a tax on gross receipts from air commerce and transportation and is therefore preempted by the AHTA.[9]

On appeal, the Texas Comptroller argued that the AHTA does not preempt the Texas franchise tax because it is derived from a taxable entity’s entire revenue, not just revenue from air commerce.[10] The Texas Comptroller also argued there was insufficient evidence to support the district court’s holding that American Airlines’ baggage fees were not allowed any deductions or exclusions noting that American Airlines had in fact excluded certain amounts in arriving at total revenue.[11]

The 15th District Court of Appeals upheld the district court, disagreeing with the Texas Comptroller on both counts. The court held first that the AHTA preempts the Texas franchise tax as applied to American Airlines because taxable margin for Texas franchise tax purposes contains the gross receipts from American Airlines’ transportation revenue.[12] The franchise tax’s deductions and exclusions did not save it from preemption because the AHTA preemption “depends not on whether the Texas franchise tax is a ‘straight-forward gross receipts tax’, but instead on whether it is ‘imposed on or measured by’ the gross receipts from [American Airlines’] transportation revenues.”[13] The Court continued stating, “Although the Texas Legislature did not style the franchise tax as a straight-forward gross-receipts tax, the AHTA preempts it insofar as taxable margin is ‘measured by gross receipts’ from [American Airlines’] transportation revenues.”[14]

The court also disagreed with the Texas Comptroller’s second argument noting there was ample evidence to show that gross receipts could not be reduced by any deductions or exclusions in arriving at total revenue.[15] Although American Airlines was allowed a 30% of total revenue deduction, the court equated this to an adjustment to the tax rate.[16] In a footnote, the court noted that if the State reduced the tax rate by 30% instead of reducing total revenue by 30% margin would be the same regardless of the apportionment factor.[17] Thus, held the court, “[American Airlines’] transportation revenues in its 2015 franchise tax report is a tax on a direct percentage of [its] gross receipts from its apportioned transportation revenues.”[18]

While the court’s decision upholds the trial court’s holding preempting the Texas franchise tax “as applied” to American Airlines and may still be appealed to the Texas Supreme Court, it nevertheless creates potential refund opportunities for many entities similarly engaged in airline transportation services with similar facts. Taxpayers who believe they may be impacted may want to consider filing refund claims on a protective basis pending final resolution of this case.

[1] Hancock v. American Airlines, Inc., 2026 WL 969078 at 2 (Tex.App. (15 Dist.), 2026)
[2] See id. at 3.
[3] See id. at 2.
[4] See id.
[5] See id.
[6] See id.
[7] See id.
[8] See id.
[9] See id.
[10] See id.
[11] See id.
[12] See id. at 6.
[13] See id.
[14] See id.
[15] See id. at 7.
[16] See id.
[17] See id. n.9.
[18] See id. at 7.