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Cost of Goods Sold Rulings Means Tax Refunds for Some in Texas

Some Texas service businesses can now include indirect labor costs in their labor/cost of goods sold (COGS) calculation for franchise (margin) tax purposes and are eligible for a Texas franchise tax refund for open tax years, thanks to two recent court cases.

The Texas Court of Appeals ruled that Titan Transportation, which subcontracts services to deliver construction materials, could exclude payments to independent contractors from its gross receipts, lessening the company’s franchise tax burden and making it eligible for a tax refund. Similarly, the court ruled that oilfield services company Newpark Resources was entitled to a COGS deduction for its removal and disposal of waste materials from oil-and-gas drilling sites.

According to the ruling, deductible costs for certain businesses now not only include W-2 wages, but also 1099 payments for independent contractors, payroll taxes, expenses for temporary labor and other types of expenses. For certain service businesses, the expanded deduction could result in material modifications to their Texas franchise tax.

To find out if this cost of goods sold ruling applies to your business and whether you qualify for a Texas franchise tax refund, contact Doeren Mayhew’s Houston CPAs.

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