Sales of fighter jets to the U.S. government under the Foreign Military Sales (FMS) program were sales in Texas for Texas franchise tax purposes. The sales transactions took place in Texas between the defense contractor and the U.S. government.
What is the Foreign Military Sales (FMS) Program?
Sales under the FMS program involve two separate contracts:
- one between a domestic defense contractor and the U.S. government, and
- one between the U.S. government and a foreign government.
Under the program, the defense contractor delivers the military equipment to the U.S. government. Then, the U.S. government delivers the equipment to the foreign government. The foreign government has no legal rights with respect to the contract between the defense contractor and the U.S. government
Military Sales Receipts Sourced to Texas
Here, the defense contractor sourced its receipts from sales of fighter jets to the foreign countries that purchased the jets from the U.S. government. Removing these receipts from its apportionment factor numerator reduced its Texas franchise tax liability.
However, the U.S. government was the buyer in these FMS transactions. The fighter jets sales and ended in Texas. Thus, the sales were properly sourced to Texas.
Lockheed Martin Corp. v. Hegar, Court of Appeals of Texas, Third District, Austin, No. 03-16-00303-CV, June 8, 2018