Broader Revenue Exclusion Under Texas Franchise Tax

June 2015

A recent ruling by the Texas Court of Appeals could widen the limits of revenue excluded from the Revised Texas Franchise Tax (RTFT).

In its recent ruling in Titan Transportation, LP v. Combs, the court said a company that subcontracts transportation services to deliver “aggregate”—defined as a combination of rock or gravel or dirt, sand or “fines” (dirt that comes off crushed rock)—to real-property construction sites can exclude payments to subcontractors from total revenue. This allowance permits the transportation company to receive a RTFT refund.


Titan Transportation, LP (Titan) transports, delivers and deposits aggregate to construction sites. Titan usually pays subcontractors to perform these services with a percentage of its revenue earned. Titan claimed an exclusion from payments made to those subcontractors according to the Texas Tax Code, which allows an exclusion from total revenue for “subcontracting payments handled by the taxable entity to provide services, labor, or materials in connections with the actual or proposed design, construction, remodeling, or repair of improvements on real property.” The Texas Comptroller disagreed, and Titan argued for the exclusion based on the cost of goods sold (COGS) deduction, which would include subcontractor payments in its COGS calculation. The trial court disagreed, and Titan appealed.


The Court of Appeals said the Texas Comptroller’s interpretation of the statute was narrow and restrictive, rejecting it for a broader, more expansive understanding. The comptroller argued Titan was not a construction company, its customer contracts did not reference fee-splitting agreements with independent haulers and Titan did not pay its independent haulers with the actual money from the contracts with its customers because Titan often paid its subcontractors prior to transport. The comptroller argued this practice disqualified Titan’s funds from “flow-through” qualification.

The Court of Appeals rejected each of these arguments.

First, the court said the real property service revenue exclusion is not limited to construction companies, and a taxpayer only needs to have some reasonable nexus between the real property services delineated in the statute and the service, labor or materials for which the subcontractors receive payment. Titan met this threshold because hauling and depositing aggregate connects—“logically and reasonably”—to construction of real property. Next, the court held Titan’s independent transportation agreements satisfied the statute’s “mandated by contract” language requirement, meaning Titan isn’t required to include a clause referencing subcontractors in its contracts with customers to get the exemption. Finally, the court rejected the comptroller’s “segregate, wait, and trace requirement” for “flow-through funds” as overly formalistic and inconsistent with the statute’s plain language. Titan’s procedures ensured it paid its independent haulers from gross receipts attributable to the work they performed. The statute’s “flow-through” requirement did not require Titan to pay its independent haulers with the actual dollars Titan received from its customers because, according to the Court of Appeals, timing and flow of money was immaterial under the accrual method of accounting. The court declined to address Titan’s COGS calculation argument.

Executive Summary

This decision could create an opportunity for taxpayers engaged in subcontracting services that are “logically and reasonably” connected with construction activities to receive a refund. Taxpayers should review payments to determine if any services, labor or materials are sufficiently connected to the construction, remodeling, design or repair work to receive this exclusion. In addition to the owner-operator, independent contractors and truckers, this refund may be available to other businesses such as architects, surveyors, real property repairmen, material haulers, home and commercial builders, real estate subcontractors, oilfield service companies, oil well drillers, sellers paying commission, oil and gas producers and freight brokers.

For reports originally due before 2014, aggregate haulers may rely on the ruling in Titan Transportation to exclude from revenue the amounts paid to independent contractors. For reports originally due on or after January 1, 2014, aggregate haulers are entitled to exclude from revenue the amounts paid to independent contractors per a new statutory revenue exclusion.

To qualify, the aggregate hauler must meet these conditions:

  • It must be primarily engaged in the business of transporting aggregates. (We presume this means the majority of revenues earned by the taxable entity must arise from transporting aggregates.)
  • It must make subcontracting payments to independent contractors for the performance of delivery services on behalf of the taxable entity.
  • It must haul aggregates—any commonly recognized construction material removed or extracted from the earth, including dimension stone, crushed or broken limestone, crushed or broken granite, other crushed and broken stone, construction sand and gravel, industrial sand, dirt, soil, cementitious material and caliche.

For more information on how this ruling could affect your organization, contact your BKD advisor.

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