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Texas Court of Appeals holds oilfield service provider’s waste disposal costs included in COGS for Revised Tax Franchise Tax purposes

The Texas Court of Appeals has affirmed a trial court’s decision that a combined group of companies engaged in an oilfield service business could include a subsidiary’s waste removal and disposal costs in the group’s cost of goods sold (COGS) deduction and the group was entitled to receive a Revised Texas Franchise Tax refund. The Court made a clear and concise determination that for COGS purposes the combined group is considered to be a single taxpayer and each member of a combined group’s business is considered in the context of the combined group’s business as a whole, rather than treating each member as if it were a separate taxpayer. Based upon this important finding, the Court then made an involved and complex determination that a subsidiary could include its labor costs and third-party expenses for waste removal and disposal in its COGS because it furnished the labor for the construction or improvement of real property. The Court concluded that the disposal of waste material was an essential and direct component of the drilling process.

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