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Texas Appellate Court addresses potential application of COGS deduction to service providers and sellers of intangible property

The Texas Court of Appeals for the Third Appellate District recently reversed a trial court and held that a rent-to-own business whose majority of revenues come from rental-purchase agreements was entitled to the preferential 0.5% revised Texas franchise tax rate for the 2008 report year. The Court of Appeals ruled that the taxpayer was entitled to the 0.5% tax rate applicable to certain retailers and wholesalers because the revenues constituted sales. Also, the Court of Appeals remanded the case to the district court to determine whether the taxpayer was entitled to claim the cost of goods sold (COGS) deduction and, if so, in what amount. While the precedential effect of the ruling may be somewhat limited in direct application, the decision provides important guidance in determining if a taxpayer is eligible for the 0.5% tax rate.

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