The Texas Supreme Court Addresses What "In This State" Means in Sourcing the Sale of TPP For Texas Franchise Tax Apportionment

In a case involving the sale of bunker fuel, the Texas Supreme Court recently addressed the meaning of a sourcing statute for Texas franchise tax. [1] The taxpayer argued that revenues from the sale of its bunker fuel could not be source to Texas for Texas franchise tax apportionment purposes because the fuel was not consumed or used in Texas. The Court disagreed holding that the relevant sourcing statute focuses on where the goods are delivered in determining how revenue is sourced.

For context, Texas has adopted a single-factor apportionment formula for apportioning margin, which focuses on sales sourced to Texas (the numerator) as compared to gross receipts from a taxable entity’s entire business (the denominator).[2] With respect to gross receipts from the sale of tangible personal property, Section 171.103 of the Texas Tax Code, which delineates the various items that are included in the numerator, reads in relevant part as follows:

[I]n apportioning margin, the gross receipts of a taxable entity from its business done in this state is the sum of the taxable entity’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 ….” [3]

The taxpayer (NuStar Energy, L.P) is a Texas-based entity that sells high-sulfur bunker fuel for use in large, oceangoing ships and delivers that fuel to primarily foreign-registered vessels at Texas ports.[4] For the Texas franchise tax reports years at issue (2011 to 2013), it originally sourced revenue from those sales to Texas for apportionment purposes, but thereafter sought a refund of tax paid claiming the revenues should not be sourced to Texas because the non-resident purchasers “did not (and legally cannot) use, sell, or otherwise consume bunker fuel in Texas or Texas waters.”[5] NuStar Energy, L.P. noted that its buyers were only in Texas temporarily to take delivery of the bunker fuel, not to use or consume the purchased fuel in Texas.[6] It argued that the phrase “in this state” in Section 171.103(a)(1) “plainly requires the taxpayer and taxing authority to look beyond the transfer point to determine the buyer’s location for the goods.”[7] The Texas Comptroller countered that the above language “fixes the sale situs at the location where the transaction is consummated by the actual transfer of possession and control to the buyer.”[8]

In rejecting NuStar Energy, L.P.’s  argument, the Court noted that the prepositional phrase “to a buyer in this state” modifies the verb phrase “if the property is delivered or shipped.”[9] Otherwise, noted the Court, accepting NuStar’s reading of “in this state” would render the phrase “if the property is delivered or shipped” meaningless.[10] Because the Legislature must be presumed to have chosen its words with care, the Court held it should read the statute to give effect to all if its terms and not render any part of it surplusage.[11] According to the Court, only a “point-of-transfer construction” of the statute accomplishes that.[12]

The Court also seemed to at least indirectly distinguish its prior holding in Lockheed Martin Corp. v. Hegar, 601 S.W.3d 769 (Tex. 2020) where the Court had previously held that fighter aircraft delivered to the U.S. Government at the Lockheed Martin facilities in Fort Worth were properly sourced out-of-state where the ultimate buyers were foreign governments.[13] The Court noted that in Lockheed Martin it explained that the words “to a buyer” distinguish “the intended recipient of the goods from a mere intermediary who takes possession only to facilitate further transport to the buyer.”[14] In a footnote, the Court added that a “condition of sale” for purposes of Section 171.103 is “a term that must be met for the transaction to be completed.”[15] 

The Court acknowledged that its holding in NuStar Energy, L.P. may create tension with “decisions from other jurisdictions that have reached contrary conclusions about very similar language.”[16] But the Court went on to state also that the remedy to bring Texas into conformity with other states must necessarily come from the Legislature.[17]

In conclusion, the Court held that Section 171.103(a)(1)’s language regarding the sourcing of revenues from the sale of tangible personal property provides that goods are delivered in the statutory sense where the buyer receives them in the actual sense.[18]