CCH Tax Day Report
An information technologies consulting company, taxpayer, could not take a cost of goods sold deduction on software it developed for purposes of calculating its Texas franchise tax liability. The taxpayer had argued that the software is tangible personal property that is a good for purposes of the cost of goods sold (COGS) deduction and that it should be able to deduct the related costs. Alternatively, the taxpayer argued that it was entitled to exclude the payments it made to subcontractors from total revenue. The Comptroller disagreed holding that the taxpayer was not entitled to a COGS deduction because it does not own the software at issue. Furthermore, the Texas Tax Code does not allow subtracting payments like the ones made to the subcontractors.
Decision, Hearing No. 111,107, Texas Comptroller of Public Accounts, September 14, 2016, released December 2016, ¶404-211