# Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas v. Autohaus LP, LLP > Texas Court of Appeals, 3rd District (Austin) · December 14, 2015 URL: https://www.frixlaw.com/law-library/cases/4069812 ## Case - **Court:** Texas Court of Appeals, 3rd District (Austin) - **Decided:** December 14, 2015 - **Precedential status:** Published - **Opinion:** Opinion - **Cited by:** 0 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4069812 ## How later opinions describe it (automated extraction) - holding that appellate court may not affirm summary judgment on ground not asserted in summary judgment motion ## Opinion text ACCEPTED 03-15-00427-CV 8232163 THIRD COURT OF APPEALS AUSTIN, TEXAS 12/14/2015 5:15:01 PM JEFFREY D. KYLE CLERK No. 03-15-00427-CV __________________________________ FILED IN In the Court of Appeals 3rd COURT OF APPEALS AUSTIN, TEXAS for the Third Judicial District12/14/2015 5:15:01 PM Austin, Texas JEFFREY D. KYLE Clerk ___________________________________ GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS, AND KEN PAXTON, ATTORNEY GENERAL OF THE STATE OF TEXAS, Appellants, v. AUTOHAUS LP, LLP, Appellee. ____________________________________ On Appeal from the 419th Judicial District Court Travis County, Texas _____________________________________ APPELLANTS’ BRIEF ____________________________________________________ KEN PAXTON CYNTHIA A. MORALES Attorney General of Texas Assistant Attorney General State Bar No. 14417420 CHARLES E. ROY Financial Litigation and Charitable Trusts First Assistant Attorney General Division JAMES E. DAVIS OFFICE OF THE ATTORNEY GENERAL Deputy Attorney General for Civil P.O. Box 12548 Litigation Austin, Texas 78711-2548 Telephone: (512) 475-4470 ROBERT O’KEEFE Telecopier: (512) 477-2348 Division Chief cynthia.morales@texasattorneygeneral.gov Taxation Division Counsel for Appellants ORAL ARGUMENT REQUESTED IDENTITY OF THE PARTIES AND COUNSEL Appellants: Appellee: Glenn Hegar Autohaus LP, LLP Comptroller of Public Accounts of the State of Texas Counsel for Appellee at trial and Ken Paxton on appeal: Attorney General of the State of Texas David Colmenero State Bar No. 18347650 Counsel for Appellants at trial and on appeal: Alex Pilawski State Bar No. 24074899 Cynthia Morales State Bar No. 14417420 MEADOWS, COLLIER, REED, Assistant Attorney General COUSINS, CROUCH & UNGERMAN, L.L.P. OFFICE OF THE ATTORNEY 901 Main Street, Ste. 3700 GENERAL Dallas, TX 75202 Financial Litigation and Charitable Tel: 214-744-3700 Trusts Division Fax: 214-747-3732 P.O. Box 12548 (MC 17) dcolmenero@meadowscollier.com Austin, Texas 78711-2548 apilawski@meadowscollier.com Tel: (512) 475-4470 Fax: (512) 477-2348 Former additional counsel for cynthia.morales@texasattorneygeneral.gov Appellee at trial: Jason B. Freeman State Bar No. 24069736 MEADOWS, COLLIER, REED, COUSINS, CROUCH & UNGERMAN, L.L.P. Thomas L. Fahring State Bar No. 24074194 P.O. Box 43 Anahuac, Texas 77514 i TABLE OF CONTENTS Identity of the Parties and Counsel ............................................................................ i Table of Contents ...................................................................................................... ii Index of Authorities ...................................................................................................v Statement of the Case.................................................................................................x Issues Presented ....................................................................................................... xi Statement of Facts ......................................................................................................2 I. Statutory and Regulatory Background ............................................................2 A. Texas Tax Code Section 171.1012........................................................3 B. Comptroller Rule 3.588 .........................................................................4 II. Autohaus’s Tax Report and Suit......................................................................7 A. Autohaus’s 2009 Franchise Tax Report and the Comptroller’s Audit ......................................................................................................7 B. Autohaus’s Protest Letter and Protest Payment ....................................8 C. Autohaus’s suit ....................................................................................10 Summary of Argument ............................................................................................14 Argument..................................................................................................................15 I. Autohaus’s Installation of Automotive Parts onto or into Customer- Owned Automobiles During Repair or Maintenance Work Is Not the “Production” of Those Parts Under Section 171.1012, and Therefore the Labor Costs for Such Installation May Not Be Deducted as Costs of Goods Sold. ...............................................................................................15 ii II. Comptroller Rule 3.588(b)(7) Is Both Valid and Constitutional. .................15 A. Costs of goods sold under section 171.1012 include the cost of acquiring or producing goods for sale, but excludes the cost of providing services................................................................................16 B. Section 171.1012 is ambiguous in regard to transactions involving both services and sales and in its use of the word “installation” because the labor involved in installation can take place either in the context of the production of a good for sale (deductible) or in the context of services performed for another (not deductible). Rule 3.588 addresses this ambiguity. ......................17 C. Autohaus does not “produce” purchased automotive parts when it installs them onto or into customer-owned automobiles, but rather it engages in a mixed transaction involving a sale of the part and the provision of an automotive repair or maintenance service. Autohaus may deduct as costs of goods sold its cost of acquiring the automotive parts, but may not deduct labor costs for “producing” the parts by installing them onto or into customer-owned automobiles..............................................................20 D. Autohaus’s claim also fails under the application of Rule 3.588(b)(7), and the Rule is both valid and constitutional ..................25 III. Even If a Taxable Entity May Deduct Labor Costs for Installing Automotive Parts onto or into Customer-Owned Automobiles During Repairs as Costs of Goods Sold, Material Issues of Fact Preclude the Granting of Summary Judgment and the Award of a Specific Refund Amount on Autohaus’s Chapter 112 Claim. .................................................37 IV. The Trial Court Had No Jurisdiction to Consider Autohaus’s Attempted Challenge Under the Uniform Declaratory Judgment Act to Comptroller Rule 3.588(b)(7) or Its Request for Attorneys’ Fees and Court Costs Because Autohaus’s Claim Did Not Fall Within the Scope of the UDJA and Was, Apart From The Attorneys’ Fees and Court Costs Request, Redundant of Its Chapter 112 Claim. .........................41 iii A. A trial court may not grant a declaratory judgment regarding the validity and constitutionality of a rule under the UDJA, and therefore the trial court had no jurisdiction to grant a declaratory judgment nor attorney’s fees or court costs under the UDJA in this case. .........................................................................42 B. Autohaus did not raise a claim within the ultra vires exception.........47 C. While Texas Government Code section 2001.038 provides courts with jurisdiction to grant declaratory judgments regarding the validity of a rule, such provision does not provide for the award of attorneys’ fees or court costs. Thus even if Autohaus had raised such a claim, and the trial court had jurisdiction under section 2001.038 to grant a declaratory judgment on Rule 3.588(b)(7), it had no jurisdiction to award attorneys’ fees or court costs. ..............................................................48 D. Autohaus may not recover attorneys’ fees or court costs for redundant claims that fall under the exclusive jurisdiction of Chapter 112. ........................................................................................49 E. Conclusion ...........................................................................................52 Prayer .......................................................................................................................53 Certificate of Compliance ........................................................................................54 Certificate of Service ...............................................................................................55 Appendix iv INDEX OF AUTHORITIES Cases BFI Waste Systems of N. America, Inc. v. Martinez Envtl. Grp., 93 S.W.3d 570 (Tex. App.—Austin 2002, pet. denied) ................................26 City of El Paso v. Heinrich, 284 S.W.3d 366 (Tex. 2009) .............................................................44, 46, 47 City of McKinney v. Hank’s Rest. Grp., L.P., 412 S.W.3d 102 (Tex. App.—Dallas 2013, no pet.) ...............................45, 46 City of San Antonio v. Shavano Ranch, No. 04-13-00623-CV, 2014 WL 631484 (Tex. App.—San Antonio Feb. 19, 2014, pet. denied) (mem. op.)..........................................................49 Combs v. Chapel Zenray, Inc., 357 S.W.3d 751 (Tex. App.—Austin 2011, pet. denied) .............................30 Combs v. STP Nuclear Operating Co., 239 S.W.3d 264 (Tex. App.—Austin 2007, pet. denied) ..............................33 El Paso Natural Gas Co. v. Strayhorn, 208 S.W.3d 676 (Tex. App.—Texarkana 2006, no pet.) ..............................40 Hilco Elec. Coop. v. Midlothian Butane Gas Co., Inc., 111 S.W.3d 75 (Tex. 2003) .....................................................................22, 30 In re Nestle USA, Inc., 359 S.W.3d 207 (Tex. 2012) ...................................................................51, 52 In re Nestle USA, Inc., 387 S.W.3d 610 (Tex. 2012) .........................................................................33 Jackson v. State Office of Admin. Hearings, 351 S.W.3d 290 (Tex. 2011) ...................................................................50, 51 John G. and Marie Stella Kenedy Mem’l Found. v. Dewhurst, 90 S.W.3d 268 (Tex. 2002) ...........................................................................49 v Kirby Lake Develop., Ltd. v. Clear Lake City Water Auth., 320 S.W.3d 829 (Tex. 2010) .........................................................................29 MBM Fin. Corp. v. Woodlands Operating Co., L.P., 292 S.W.3d 660 (Tex. 2009) ............................................................ 50, 51, 52 Myers v. State, 169 S.W.3d 731 (Tex. App.—Austin 2005, no pet.).............................. 27, 28 Nixon v. Mr. Prop. Mgmt. Co., Inc., 690 S.W.2d 546 (Tex. 1985) ...................................................................37, 40 Patel v. Texas Dep’t of Licensing & Regulation, 469 S.W.3d 69 (Tex. 2015) ...........................................................................48 R.R. Comm’n of Tex. v. Texas Citizens for a Safe Future & Clean Water, 336 S.W.3d 619 (Tex. 2011) ...................................................................27, 32 Sanadco, Inc. v. Office of Comptroller, No. 03-11-00462-CV, 2015 WL 1478200 (Tex. App.—Austin March 25, 2015, pet. denied, motion for reh’g of pet. filed November 12, 2015) .................................................................50, 51, 52 Stiles v. Resolution Trust Co., 867 S.W.2d 24 (Tex. 1993) ...........................................................................33 Strayhorn v. Raytheon E-Sys., Inc., 101 S.W.3d 558 (Tex. App.—Austin 2003, pet. denied) ..............................51 Texas Dep’t of Trans. v. Sefzik, 355 S.W.3d 618 (Tex. 2011) ...................................................................44, 46 Texas Entm’t Ass’n, Inc. v. Combs, 431 S.W.3d 790 (Tex. App.—Austin 2014, pet. denied) , cert. denied sub nom, Texas Entm’t Ass’n Inc. v. Hegar, 135 S.Ct. 1568 (2015) ............ 33 Texas State Bd. of Vet. Med. Examiners v. Giggleman, 408 S.W.3d 696 (Tex. App.—Austin 2013, no pet.)..............................passim vi TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432 (Tex. 2011) .............................................................22, 28, 30 Upjohn Co. v. Rylander, 38 S.W.3d 600 (Tex. App.—Austin 2000, pet. denied) ..........................32, 33 Zimmer US, Inc. v. Combs, 368 S.W.3d 579 (Tex. App.—Austin 2012, no pet.).........................18, 21, 26 Constitutional Provisions Tex. Const. art. I, § 3 ......................................................................................... 32 Tex. Const. art. VIII, § 1(a) ................................................................................32 U.S. Const. amend. XIV, § 1 ..............................................................................32 Statutes TEX. CIV. PRAC. & REM. CODE § 37.004 ......................................... 42, 43, 44, 46 TEX. CIV. PRAC. & REM. CODE § 37.006 ............................................... 43, 44, 46 TEX. CIV. PRAC. & REM. CODE § 37.009 ............................................................46 TEX. CIV. PRAC. & REM. CODE § 37.001 ..............................................................x TEX. GOV'T CODE § 2001.038 ..................................................................... passim TEX. TAX CODE § 111.002 ..................................................................................18 TEX. TAX CODE § 111.104 ..................................................................................39 TEX. TAX CODE § 112.051 ....................................................................................8 vii TEX. TAX CODE § 112.052 .............................................................................. ix, 9 TEX. TAX CODE § 112.053 ..............................................................................9, 50 TEX. TAX CODE § 112.060 ................................................................................. 39 TEX. TAX CODE § 112.108 ..................................................................................51 TEX. TAX CODE § 171.001 ....................................................................................2 TEX. TAX CODE § 171.002 ....................................................................................3 TEX. TAX CODE § 171.101 ....................................................................................3 TEX. TAX CODE § 171.106 ....................................................................................3 TEX. TAX CODE § 171.1012 ........................................................................ passim TEX. TAX CODE § 171.1016 ..................................................................................2 Rules TEX. R. CIV. P. 166a(c) .......................................................................................37 Regulations 34 TEX. ADMIN. CODE § 3.588 .................................................................... passim Other Authorities 32 Tex. Reg. 6788 (2007) .....................................................................................4 32 Tex. Reg. 10034 (2007) .................................................................... 4, 5, 6, 29 38 Tex. Reg. 3415 (2013) .....................................................................................5 viii Legislative Enactments Act of May 2, 2006, 79th Leg., 3rd C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 8 ......................................................... 3, 4, 29 Comptroller’s Decisions Comptroller Decision 108, 124, STAR Accession No. 201309781H, September 12, 2013 ............................................................................................28 Comptroller Decision 108, 125, STAR Accession No. 201309781H, September 12, 2013 ............................................................................................28 Comptroller Decision 108, 126, STAR Accession No. 201309781H, September 12, 2013 ............................................................................................28 ix STATEMENT OF THE CASE Nature of the This is a tax protest suit brought under section 112.052 of the case: Tax Code and a suit for declaratory judgment. Trial Court: 419th Judicial District Court, Travis County The Honorable Darlene Byrne, presiding Course of Appellee Autohaus LP, LLP (“Autohaus”) filed this lawsuit Proceedings: against the Texas Comptroller (“Comptroller”) and Texas Attorney General (collectively “Appellants”), on March 22, 2013. CR4. Autohaus filed a motion for summary judgment and Appellants filed a response, cross-motion for summary judgment, and plea to the jurisdiction. CR32–84, 93–177. On July 22, 2014, the trial court issued an order granting Autohaus’s motion for summary judgment and denying Appellants’ motion for summary judgment and plea to the jurisdiction. CR196–98. After a bench trial on the amount of attorneys’ fees and court costs to be awarded, the trial court signed a final judgment on April 29, 2015. CR344–49. A motion for new trial was filed on May 29, 2015, and was denied on July 9, 2015. CR350–64, 383. Notice of appeal was filed on July 10, 2015. CR384–85. Trial Court’s On April 29, 2015, the trial court entered a final judgment in Disposition: favor of Autohaus, and ordered Appellants to issue a refund of $14,227.09 of Texas franchise tax, plus statutory interest. CR344–49. The trial court also declared that Comptroller Rule 3.588(b)(7), as it applies to the term “production,” is invalid and unconstitutional, and awarded attorneys’ fees and court costs to Autohaus. CR346–48. x ISSUES PRESENTED Section 171.1012 of the Tax Code permits a taxable entity to deduct as costs of goods sold its direct costs of acquiring or producing goods that it sells to customers. Taxable entities may deduct labor costs for producing goods for sale, including installation labor. Comptroller Rule 3.588(b)(7) implements section 171.1012 and clarifies that installation is production only if the installation occurs during the manufacturing or construction process. This appeal decides whether a taxable entity that purchases goods for sale may, in addition to deducting its costs of acquiring such goods for sale, also deduct labor costs for “producing” those same goods if it installs those goods onto or into personal property belonging to a customer. The appeal also involves an attempted challenge to Comptroller Rule 3.588(b)(7) under the Uniform Declaratory Judgment Act (TEX. CIV. PRAC. & REM. CODE §§ 37.001, et. seq.)(“UDJA”), and the award of attorneys’ fees thereunder. The specific issues in this appeal are: 1. Autohaus’s installation of automotive parts onto or into customer- owned automobiles during repair or maintenance work is not the “production” of those parts under section 171.1012, and therefore the labor costs for such installation may not be deducted as costs of goods sold. 2. Comptroller Rule 3.588(b)(7) is both valid and constitutional. 3. Even if a taxable entity may deduct labor costs for installing automotive parts onto or into customer-owned automobiles during repairs as costs of goods sold, material issues of fact preclude the xi granting of summary judgment and the award of a specific refund amount on Autohaus’s Chapter 112 claim. 4. The trial court had no jurisdiction to consider Autohaus’s attempted challenge under the Uniform Declaratory Judgment Act to Comptroller Rule 3.588(b)(7) or its request for attorneys’ fees and court costs because Autohaus’s claim did not fall within the scope of the UDJA and was, apart from the attorneys’ fees and court costs request, redundant of its Chapter 112 claim. xii No. 03-15-00427-CV ______________________________________ In the Court of Appeals for the Third Judicial District Austin, Texas ________________________________________ GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS, AND KEN PAXTON, ATTORNEY GENERAL OF THE STATE OF TEXAS, Appellants, V. AUTOHAUS LP, LLP, Appellees. __________________________________________ On Appeal from the 419th Judicial District Court, Travis County, Texas __________________________________________ APPELLANTS’ BRIEF __________________________________________ TO THE HONORABLE JUSTICES OF THE THIRD COURT OF APPEALS: Autohaus seeks to deduct, as costs of goods sold, its labor costs for “producing” purchased automotive parts when it installs those parts onto or into a customer’s automobile during repairs or maintenance. Autohaus’s claim fails because its installation of an automotive part onto or into a customer’s automobile is not the “production” of that part and is not a cost of Autohaus “acquiring or producing” that part for sale. Autohaus’s challenge to Comptroller Rule 3.588(b)(7) likewise fails because the rule properly and constitutionally 1 implements the Legislature’s intent that services not be deductible as costs of goods sold and that a business may only deduct installation labor as costs of producing a good for sale when materials are installed onto or into personal property that the business owns and is actually producing for sale. Autohaus’s attempted declaratory judgment claim under the UDJA fails because it does not fall within the scope of the UDJA and, apart from an improper request for attorneys’ fees and court costs, it requests relief redundant of the issues in its Chapter 112 claim. The judgment of the trial court should be reversed, the declaratory judgment portion dismissed for want of jurisdiction, and judgment rendered in favor of Appellants or, alternatively, the case remanded for a new trial. STATEMENT OF FACTS I. STATUTORY AND REGULATORY BACKGROUND The franchise tax imposes a tax on business entities in Texas for the privilege of doing business in Texas. TEX. TAX CODE § 171.001(a). At the time at issue in this appeal, for business entities with more than $10,000,000 in total revenue1 like Autohaus, the determination of the amount of franchise tax due first 1 Businesses with less than $10,000,000 in revenue also had, and continue to have, the option of using total revenue instead of margin as their tax base, but that provision is not relevant to this appeal. See TEX. TAX CODE § 171.1016. 2 required the computation of the entity’s margin, which was the lesser of: (1) 70% of total revenue; (2) an amount computed by subtracting cost of goods sold from total revenue; or (3) an amount computed by subtracting compensation paid to employees during the reporting period from total revenue. 2 Act of May 2, 2006, 79th Leg., 3rd C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 8 (former TEX. TAX CODE § 171.101(a)), current version at TEX. TAX CODE § 171.101(a)(1). While section 171.101(a) was amended to allow for an alternative means to determine margin, the subtraction of costs of goods sold from total revenue remains as an option for taxpayers. See TEX. TAX CODE § 171.101(a)(1)(B)(ii)(a)(1). A. Texas Tax Code Section 171.1012 The calculation of cost of goods sold is governed by Tax Code section 171.1012, which permits a business to subtract certain of its costs to acquire or produce the goods sold. TEX. TAX CODE § 171.1012(a)(1), (b), (c). “Goods” are real or tangible personal property sold in the ordinary course of business of a taxable entity, but do not include any services. TEX. TAX CODE § 171.1012(a)(1), (a)(3)(B)(ii). The entity must own the goods that it sells in order to make a subtraction for cost of goods sold. TEX. TAX CODE § 171.1012(i). Among the costs 2 Once the margin is calculated, a percentage of that margin is then apportioned to Texas, and that portion of the margin is subject to tax at the rate of 0.5% for qualifying retailers and wholesalers and 1.0% for all other taxable entities. TEX. TAX CODE §§ 171.106; 171.002(a), (b). 3 that may be included as cost of goods sold are labor costs to acquire the goods or to produce the goods. TEX. TAX CODE § 171.1012(c)(1). If an entity produced the goods that it sold, it may include its cost of materials that are an integral part of the specific property produced or which are consumed in the ordinary course of performing production activities. TEX. TAX CODE § 171.1012(c)(2), (c)(3). Production includes “construction, installation, manufacture, development, mining, extraction, improvement, creation, raising, or growth.” TEX. TAX CODE § 171.1012(a)(2). The language of these subsections remains unchanged from the time of their initial enactment in January 1, 2008. Cf. TEX. TAX CODE § 171.1012 to Act of May 2, 2006, 79th Leg., 3rd C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 13–16. B. Comptroller Rule 3.588 In September 2007, following the passage of the enacting legislation for Section 171.1012, the Comptroller proposed Rule 3.588 to implement section 171.1012. See 32 Tex. Reg. 6288, 6288–92 (2007). The rule was adopted on December 28, 2007, and it went into effect on January 1, 2008, the same day as section 171.1012. See 32 Tex. Reg. 10034, 10034–38 (2007). Among the provisions of Rule 3.588 that are relevant to this appeal are the following subsections, in pertinent part: 4 (b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise. (3) Goods—Real or tangible personal property sold in the ordinary course of business of a taxable entity. (7) Production—Construction, manufacture, installation occurring during the manufacturing or construction process, development, mining, extraction, improvement, creation, raising, or growth; (10) Tangible personal property— (B) does not include: (ii) services. (c) General rules for determining costs of goods sold. (7) Mixed transactions. If a transaction contains elements of both a sale of tangible personal property and a service, a taxable entity may only subtract as cost of goods sold the costs otherwise allowed by this section in relation to the tangible personal property sold; (8) Owner of goods. A taxable entity may make a subtraction under this section only if that entity owns the goods. 34 TEX. ADMIN. CODE § 3.588(b)(3), (b)(7), (b)(10)(b)(ii), (c)(7), (c)(8). These subsections have been in force and unchanged, apart from some renumbering, since January 1, 2008. Cf. 32 Tex. Reg. at 10035–36 to 38 Tex. Reg. 3415, 3417– 18 (2013). Also pertinent are subsections (d)(1), (d)(2), and (d)(3), which were amended in 2013 for clarity and to better conform with applicable federal law and section 171.1012. See 38 Tex. Reg. at 3416, 3419. As originally enacted and in effect at the time of Autohaus’s claim, those subsections read: 5 (d) Costs of goods sold. The cost of goods sold includes all direct costs of acquiring or producing the goods, including: (1) labor costs including W-2 wages, IRS Form 1099 wages, temporary labor, payroll taxes and benefits; (2) cost of materials that are an integral part of specific property produced; [and] (3) cost of materials that are consumed in the course of performing production activities[.] 32 Tex. Reg. at 10036–37 (2007) (current version at 34 TEX. ADMIN. CODE § 3.588(d)(1), (d)(2), (d)(3)). 3 3 Those sections currently read: (d) Direct costs. The cost of goods sold includes all direct costs of acquiring or producing the goods. Direct costs include: (1) Labor costs. A taxable entity may include in its costs of goods sold calculation labor costs, other than service costs, that are properly allocable to the acquisition or production of goods and are of the type subject to capitalization or allocation under Treasury Regulation Sections 1.263A-1(e) or 1.460-5 as direct labor costs, indirect labor costs, employee benefit expenses, or pension and other related costs, without regard to whether the taxable entity is required to or actually capitalizes such costs for federal income tax purposes; (2) Incorporated materials. A taxable entity may include in its costs of goods sold calculation the cost of materials that are an integral part of specific property produced. (3) Consumable materials. A taxable entity may include in its costs of goods sold calculation the cost of materials that are consumed in the ordinary course of performing production activities. 34 TEX. ADMIN. CODE § 3.588(d)(1), (d)(2), (d)(3). 6 II. AUTOHAUS’S TAX REPORT AND SUIT A. Autohaus’s 2009 Franchise Tax Report and the Comptroller’s Audit Autohaus is an automobile dealership. CR56. It both sells and repairs automobiles, hiring subcontractors to do some of its repair work. CR56. In 2009, Autohaus filed its franchise tax report for Report Year 2009 covering its business activities from January 1, 2008 to December 31, 2008, and applied a cost-of-goods-sold deduction in the amount of $122,210,985 to calculate a taxable margin in the amount of $17,334,147. CR59. Using such deduction, Autohaus reported that it owed franchise taxes in the amount of $86,564. CR60. Autohaus’s claimed cost-of-goods deduction included costs incurred in selling automobiles (“Selling Costs”), costs of labor and materials to repair automobiles (“Repair Costs”), and costs of subcontracted labor and materials to repair automobiles (“Subletting Costs”). CR57. In the spring of 2012, the Comptroller conducted an audit of Autohaus’s 2009 franchise tax report. CR127. Autohaus was requested to provide records necessary to conduct the audit, including cost-of-goods-sold workpapers. CR127. During the conduct of the audit, it was determined that Autohaus was deducting labor costs (both for its own employees and for its subcontractors) for maintenance and repairs on customer-owned automobiles as cost of goods sold. CR128. The Comptroller disallowed those deductions, but allowed cost-of-goods-sold 7 deductions for both labor and automobile parts when Autohaus provided documentation that the work was part of production activity on a car owned by Autohaus prior to offering it for sale in the ordinary course of business. CR128. The Comptroller also allowed cost-of-goods-sold deductions for the cost of any automobile parts used in any repair performed by Autohaus or its subcontractors when Autohaus provided supporting documentation. CR128. On December 5, 2012, following the audit of Autohaus’s 2009 franchise tax report, the Comptroller disallowed a portion of the claimed cost-of-goods-sold deduction, totaling $2,481,302, and adjusted the cost-of-goods-sold deduction to $119,729,683, resulting in additional franchise tax due by Autohaus of $12,384.18. CR68, 139–40, 142. The disallowed costs were in five categories labeled by Autohaus as follows: (1) SRV CUST LBR MB; (2) SRV WARR LAB M/B; (3) SRV SUBLET RPR M/B; (4) CUST LBR-MECH L/T; and (5) 4Y/50K MAINT MB. CR70, 140. B. Autohaus’s Protest Letter and Protest Payment On January 14, 2013, Autohaus tendered to the Comptroller a protest payment of the additional franchise tax assessed and the interest due thereon, a total of $14,227.09, along with a written protest letter. CR148, 13–16, 71–76, 153–58; see TEX. TAX CODE § 112.051 (requiring payment of taxes at issue due along with written protest as a prerequisite for filing suit under Subchapter B of 8 Chapter 112 of the Tax Code); TEX. TAX CODE § 112.052 (permitting the filing of a suit against the state to recover taxes required to be paid to the state if the person has first paid the tax at issue under protest); TEX. TAX CODE § 112.053(b) (limiting the issues to be determined in the suit to those arising from the reasons expressed in the written protest as originally filed). In its protest letter, Autohaus explained that its costs-of-goods-sold deduction included costs incurred in selling automobiles (“Selling Costs”), in repairing automobiles (“Repair Costs”), and in subletting such repair work to others (“Subletting Costs”). CR13, 71, 153. Autohaus specified that the only matters at issue were the disallowed costs-of-goods-sold deductions for Repair Costs and Subletting Costs incurred in repairing automobiles. CR14, 72, 154. Under the “Statement of Grounds for Protest” section of its protest letter, Autohaus asserted generally that it was entitled to include as costs of goods sold: (1) “all of its Repair Costs, including labor costs, and all of its Subletting Costs, including labor costs and costs of materials;” or alternatively, (2) “the costs of materials that were included in its Subletting Costs.” CR14, 72, 154. Autohaus also listed twelve additional specific assertions in the protest letter under its “Statement of Grounds for Protest”, including that:  the Comptroller’s Rule 3.588(b)(7) “does not properly reflect legislative intent and is therefore invalid” (No. 5); 9  the Comptroller’s denial of “[Autohaus’s] right to include” the Repair Costs and Subletting Costs at issue as costs of goods sold, “while permitting other similarly situated taxpayers to includes such costs as costs of goods sold” o “results in the disparate treatment of taxpayers within the same class” in violation of the equal and uniform taxation requirement of “Section 1 of Article VIII of the Texas Constitution” (No.8); o “constitutes the imposition of unequal rights among taxpayers and the granting of an exclusive separate privilege to certain taxpayers in violation of Section 3 of Article I of the Texas Constitution” (No.9); o “constitutes a violation of [Autohaus’s] rights under the Equal Protection Clause of the United States Constitution” (Nos.10 and 11); and o “constitutes a violation of [Autohaus’s] rights under the Due Process Clause of the United States Constitution” (No.12). CR14–16, 72–74, 154–56. Autohaus tendered with its letter a protest payment of $14,227.09. CR17–18, 157–58. C. Autohaus’s suit On March 22, 2013, Autohaus filed suit against Appellants “pursuant to Chapters 112 and 171 of the Texas Tax Code,” and raised five claims: • “Plaintiff is Entitled to Include Labor Costs in its Cost of Goods Sold Deduction;” • Plaintiff is Entitled to Include Subletting Costs in its Cost of Goods Sold Deduction;” • “The Comptroller’s Assessment of Tax Violates Plaintiff’s Rights Under the Texas Constitution;” 10 • “The Comptroller’s Assessment of Tax Violates Plaintiff’s Rights Under the U.S. Constitution;” and • “Plaintiff is Entitled to Declaratory Judgment and Recovery of Attorney’s Fees under the Texas Uniform Declaratory Judgment Act.” CR4, 6, 8, 9, 11, 151, 163, 165, 166, 168. As relief, Autohaus prayed for: (1) a judgment for a refund of the $14,227.09 in taxes and interest that were paid under protest; (2) statutory interest on the same; (3) costs of court; (4) declarations under the Texas Uniform Declaratory Judgment Act (“UDJA”) that: (a) “[Autohaus] is entitled to a refund of the $14,227.09 in franchise tax and interest it paid under protest;” (b) “The Comptroller’s collection of tax is invalid because the Comptroller has denied [Autohaus’s] rights to equal protection and equal and uniform taxation;” (c) “The Comptroller’s collection of tax violates [Autohaus’s] equal protection and due process rights under the United States’ Constitution and is therefore invalid;” and (d) “The Comptroller’s collection of tax violates the equal and uniform taxation provision of the Texas Constitution and is therefore invalid;” (5) “Recovery of attorney’s fees as authorized by Tex. Civ. Prac. & Rem. Code § 37.009;” 11 along with “[s]uch other relief as to which Plaintiff is justly entitled in law or equity.” CR11, 12, 168, 169. Autohaus filed Plaintiff’s Motion for Summary Judgment and Incorporated Brief on May 23, 2014. CR32–84. Appellants filed Defendants’ Response to Plaintiff’s Motion for Summary Judgment, Defendants’ Cross-Motion for Summary Judgment and Defendants’ Plea to the Jurisdiction on June 17, 2014. CR93–177. The trial court heard both sets of motions on July 9, 2014, and on July 22, 2014 issued orders granting Autohaus’s motion for summary judgment and denying Appellants’ cross-motion for summary judgment and plea to the jurisdiction. CR196–98. In its order granting Autohaus’s motion for summary judgment, the trial court ordered that Autohaus was entitled to: (1) “include all of its labor costs associated with Repair Costs and all of its labor costs and materials costs associated with Subletting Costs involved in the installation of automotive parts in its cost of goods sold deduction;” (2) “a refund of the $14,227.09 in franchise tax that it paid in protest;” (3) “[statutory] interest accruing on the amount of [Autohaus’s] refund claim;” and (4) “attorneys’ fees.” CR197–98. The trial court also ruled that “Texas Comptroller Rule 3.588(b)(7) as it applies to the term “production” is unconstitutional and invalid[.]” CR197. Appellants filed a motion for reconsideration that was denied on October 30, 2014. CR260. 12 A bench trial was held on April 21, 2015 to determine the amount of attorneys’ fees and court costs to be awarded. CR344–45; 2RR5–7. Following the hearing, the trial court signed a “Proposed Final Judgment,” CR337–41, but later vacated it and issued a final judgment signed on April 29, 2015. CR344–49. The Court’s final judgment, which incorporated its July 22, 2014 rulings, ordered that Autohaus recover from Appellants “the following specific relief: A. Plaintiff is entitled to include all of its labor costs associated with Repair Costs and all of its labor costs and materials costs associated with Subletting Costs involved in the installation of automotive parts in its cost of goods sold deduction. B. Texas Comptroller Rule 3.588(b)(7) as it applies to the term ‘production’ is unconstitutional and invalid. C. Plaintiff is entitled a refund of the $14,227.09 in franchise tax that it paid in protest. D. Plaintiff is entitled to interest accruing on the amount of its refund claim as provided under Texas Tax Code § 112.060 and Texas Tax Code § 112.058(a)(4)[.]” CR346–47. The court also awarded Autohaus court costs in the amount of $274.80 and “reasonable and necessary attorneys’ fees incurred in pursuing its claim for declaratory relief” in certain specified amounts for trial and appeal. CR347. Appellants filed a motion for new trial on May 29, 2015, which was denied, and notice of appeal was filed on July 10, 2015. CR 350–64, 383, 384–85. 13 SUMMARY OF ARGUMENT Autohaus’s Chapter 112 claim fails because its labor costs for installing purchased automotive parts into or onto customers’ automobiles during repairs are not costs of “acquiring or producing” the automotive parts. Autohaus purchases the parts for resale and so may deduct its costs of acquiring the parts; it does not produce the parts and so cannot deduct production costs. Autohaus’s installation of the parts is not production of the parts, but rather a mixed transaction involving a sale of goods (automotive parts), and the provision of services (repairs). For installation labor to be a production cost, an entity must be installing materials onto or into property that it owns and is producing for sale. Autohaus does not own the customer’s automobiles onto or into which the automotive parts are installed nor is it producing the customer’s automobiles for sale. Autohaus’s challenge to Rule 3.588(b)(7) fails because the rule validly and constitutionally implements the Legislature’s intent in Tax Code section 171.1012, and Autohaus provided no evidence supporting its constitutional challenges. Autohaus’s attempted UDJA claim fails because a challenge to the constitutionality or validity of an administrative rule does not fall within the scope of the UDJA, and Autohaus’s claim was redundant of, and preempted by, its Chapter 112 claim. The court had no jurisdiction to grant any declaratory judgment or award attorneys’ fees and costs. 14 ARGUMENT I. AUTOHAUS’S INSTALLATION OF AUTOMOTIVE PARTS ONTO OR INTO CUSTOMER-OWNED AUTOMOBILES DURING REPAIR OR MAINTENANCE WORK IS NOT THE “PRODUCTION” OF THOSE PARTS UNDER SECTION 171.1012, AND THEREFORE THE LABOR COSTS FOR SUCH INSTALLATION MAY NOT BE DEDUCTED AS COSTS OF GOODS SOLD. II. COMPTROLLER RULE 3.588(b)(7) IS BOTH VALID AND CONSTITUTIONAL. (Argued Jointly) In its Tax Code Chapter 112 claim for a refund of franchise taxes paid under protest, Autohaus seeks to deduct labor costs for repair work performed on customer-owned automobiles as costs of goods sold when automotive parts are installed during the repair. Autohaus asserts that when repair work includes the installation of an automobile part, it is not a repair service to the customer, but the act of producing an automotive part for sale, and therefore both the actual cost of the part and the labor costs of the repair are deductible as costs of producing the automotive part. But while Autohaus is correct that it may deduct its costs of acquiring the automotive parts that it later sells as part of a repair to a customer-owned automobile—i.e., its actual costs to purchase the part—it may not also deduct labor costs for “producing” that same part when installing it onto or into a customer’s automobile during those repairs. All of the labor costs that are at issue in this case were incurred by Autohaus when providing a mechanic to perform the service of 15 repairing customer’s automobiles. Autohaus does not “produce” the automotive parts that its mechanics install during repairs of customer’s vehicles; its only costs of “acquiring or producing” the parts for sale are its costs of purchasing those parts. It is therefore not entitled to deduct repair services labor as costs of goods sold. Comptroller Rule 3.588(b)(7) clarifies that only installation done as a part of manufacturing or construction can be considered “production.” Contrary to Autohaus’s contentions, the Rule does not conflict with either Tax Code section 171.1012 or the Texas or U.S. Constitutions. Moreover, even without the application of Rule 3.588(b)(7) to Autohaus’s claim, Autohaus’s Chapter 112 claim fails because Autohaus does not produce the automotive parts that it purchases for sale to its customers as part of its repair services. A. Costs of goods sold under section 171.1012 include the cost of acquiring or producing goods for sale, but excludes the cost of providing services. At its most fundamental level, section 171.1012 creates certain threshold requirements for the deduction of costs as costs of goods sold. Firstly, a taxable entity must have sold “goods”—i.e., real or tangible personal property, but not services—in the ordinary course of its business. TEX. TAX CODE § 171.1012(a)(1), (a)(3)(A), (a)(3)(B). 16 Secondly, the taxable entity must have had costs of “acquiring or producing” the goods that it sold, because it is the direct costs of the entity in acquiring or producing these goods for sale that are deductible as costs of goods sold. TEX. TAX CODE § 171.1012(c). The more detailed descriptions under section 171.1012 of what specific costs qualify to be deducted must be considered in light of these two threshold requirements. Consistent with these threshold requirements, the Legislature requires that the taxable entity be the actual owner of the “real or tangible personal property” that will be “sold in the ordinary course of business.” TEX. TAX CODE § 171.1012(a)(1), (a)(3), (i). Thus, a taxable entity may not deduct as costs of goods sold either the costs of performing services or the costs of acquiring or producing goods that it does not own or that it does not sell. TEX. TAX CODE § 171.1012(a)(1), (a)(3)(B)(ii), (i). B. Section 171.1012 is ambiguous in regard to transactions involving both services and sales and in its use of the word “installation” because the labor involved in installation can take place either in the context of the production of a good for sale (deductible) or in the context of services performed for another (not deductible). Rule 3.588 addresses this ambiguity. Section 171.1012(c) allows the deduction of all direct costs for “acquiring or producing the goods” sold, including labor costs and “materials that are an integral part of specific property produced” or “materials that are consumed in the ordinary course of performing production activities.” TEX. TAX CODE § 171.1012(c)(1), (2), 17 (3). Section 171.1012(a)(2) defines “production” as including “construction, installation, manufacture, development, mining, extraction, improvement, creation, raising, or growth.” TEX. TAX CODE § 171.1012(a)(2). However, section 171.1012 does not detail how “mixed transactions” that may involve both the sale of a good and the provision of a service—such as auto repairs, hair styling, and medical care—are to be handled. Likewise, section 171.1012 does not define the term “installation.” This creates a latent ambiguity as personal property can be installed either onto or into property owned by another party during the rendition of a service for that party (e.g., the installation of hair extensions onto a person’s hair during styling of a customer’s hair), or onto or into property owned by the business entity in the course of producing a good for sale by that entity (e.g., installing hair, beads, or feathers onto a hair extension which will then be sold to a customer). Both of these ambiguities in the administration of the statute can be addressed by an administrative rule promulgated by the Comptroller. See Zimmer US, Inc. v. Combs, 368 S.W.3d 579, 586 (Tex. App.—Austin 2012, no pet.)(holding that Comptroller may address ambiguity in administration of statute by administrative rule and noting that “[T]he legislature does not need to include every specific detail or anticipate all unforeseen circumstances.”) (internal quotations and citations omitted); see also TEX. TAX CODE § 111.002(a) (providing 18 Comptroller authority to adopt rules for enforcement of Tax Code provisions and collection of taxes). The Comptroller addressed both of these ambiguities in Rule 3.588, specifically in subsections (c)(7)(“Mixed transactions”)—providing that if “a transaction contains elements of both a sale of tangible personal property and a service, a taxable entity may only subtract as cost of goods sold the costs otherwise allowed by this section in relation to the tangible personal property sold”—and in (b)(7), which specifies that installation in the context of production means “installation occurring during the manufacturing or construction process.” 34 TEX. ADMIN. CODE § 3.588 (b)(7), (c)(7). Subsections (b)(7) and (c)(7) of Rule 3.588 clarify that where there is a mixed transaction involving a service that includes the installation of a product owned by a business onto or into property owned by a customer, the installation labor retains its character as a service to the customer and so is not deductible as a cost of goods sold; rather, only the cost of the actual product owned by the business and sold to the customer is deductible as a cost of goods sold. See 34 TEX. ADMIN. CODE § 3.588(b)(7), (c)(7). If, however, the business itself installs a product owned by the business onto or into property owned by the business for purposes of producing a good for sale in the ordinary course of business, the 19 installation labor in that case is part of the production of the good for sale and so deductible as a cost of goods sold. See 34 TEX. ADMIN. CODE § 3.588 (b)(7). C. Autohaus does not “produce” purchased automotive parts when it installs them onto or into customer-owned automobiles, but rather it engages in a mixed transaction involving a sale of the part and the provision of an automotive repair or maintenance service. Autohaus may deduct as costs of goods sold its cost of acquiring the automotive parts, but may not deduct labor costs for “producing” the parts by installing them onto or into customer-owned automobiles. The Texas Legislature, recognizing that some businesses purchase goods for sale and others produce goods for sale, permits a taxable entity to deduct as costs of goods sold its direct costs of “acquiring or producing” the goods that it sells. TEX. TAX CODE § 171.1012(c). Autohaus purchases automotive parts for resale to its customers as part of repairs and so is entitled to deduct its direct costs of acquiring automotive parts that it sold. See TEX. TAX CODE § 171.1012(c). The Comptroller recognized this in its audit and allowed such deduction for any amount that Autohaus established as purchase costs for automotive parts sold. CR128. The Comptroller has always maintained that Autohaus is entitled to a cost- of-goods-sold deduction for its costs of purchasing automotive parts that it sold in the ordinary course of business, including parts sold as part of repair and maintenance work, and it provided Autohaus an opportunity to present those costs during the audit. CR128. 20 Autohaus, however, claims that it is entitled to deductions for both costs of “acquiring” the automotive parts (their purchase price), and costs of “producing” those same purchased automotive parts. Autohaus theorizes that because section 171.1012(a)(2) states that “‘Production’ includes . . . installation,” Autohaus’s act of installing the purchased automotive parts onto or into customer’s automobiles during repairs is “producing” those parts for sale, and it may deduct its labor costs for those repairs as costs of “production.” Autohaus misunderstands and misapplies section 171.1012. Firstly, section 171.1012(c) provides for the deduction of costs of “acquiring or producing” the goods that an entity sells—in other words, the cost to buy or the cost to make those goods. TEX. TAX CODE § 171.1012(c)(emphasis added). Autohaus does not make the automobile parts that it sells; it purchases them. CR57, 128. As discussed infra, the act of installing them onto or into a customer’s automobile does not render Autohaus the “producer” of those purchased parts. Secondly, section 171.1012(a)(2) does not state that every occasion of every act named therein is the production of a good for sale, nor is it reasonable to apply such a broad interpretation. See TEX. TAX CODE § 171.1012(a)(2). Not every act of “improvement,” or “growth,” or “raising,” for example, is the production of a good for sale. Rather, the subsection names acts that may be “include[d]” in the 21 production of goods for sale for those entities that make rather than buy goods for sale. See id. Words must be interpreted in their statutory context. TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 441 (Tex. 2011). The scope of a general word is therefore constrained by its statutory context. When a statute uses “words of a general nature” in connection with “particular objects or classes of persons or things, the meaning of the general words will be restricted to the particular designation.” Hilco Elec. Coop. v. Midlothian Butane Gas Co., Inc., 111 S.W.3d 75, 81 (Tex. 2003). Thus “installation,” as used in the context of “production” in section 171.1012, should not be construed as applying to installations that are not a part of actually producing a good for sale. This is particularly significant in the case of installation. The distinction between installing personal property onto or into property owned by a customer, or onto or into property owned by the business, is critical in determining whether the installation labor is a service by the business, and so not deductible, or part of production costs for the business, and therefore deductible. Section 171.1012 highlights this distinction by specifying that a business may only “make a subtraction under this section in relation to the cost of goods sold only if that entity owns the goods” which are sold. TEX. TAX CODE § 171.1012(a)(1), (i). Section 171.1012 further makes clear that in the context of the production of goods, the 22 business must own the property onto or into which materials are being installed in order for the installation to be “production” because, in order to be direct costs of producing a good, materials must be “an integral part of specific property produced.” TEX. TAX CODE § 171.1012(c)(2). In the context of installation of parts onto or into an automobile, the item or “good” being “produced” by the “installation” of “materials” is the automobile— not the automotive part which, in the context of “installation,” is the “material” being installed onto or into the “good.” Thus, in order to deduct the costs of installing automotive parts onto or into an automobile as costs of producing the good (the automobile), Autohaus must own the automobile onto or into which the parts are being installed. See TEX. TAX CODE § 171.1012(a)(1), (a)(2), (c)(2), (i). Here Autohaus is seeking the deduction of labor for repairs only on customer- owned automobiles. Its installation of parts in that context is a service installation, which is not deductible under section 171.1012, and not a production cost for the production of an automobile that Autohaus owns and is preparing for sale. Autohaus asserts that the good that it is “producing” is the automotive parts, but its argument that it “produces” automotive parts by installing them is a tautology. Installed materials must be “an integral part of the specific property produced” in order to be deductible as costs of “producing” a good. See TEX. TAX CODE § 171.1012(c)(2). Thus if the “goods” being produced are the automotive 23 parts, then the material “installed”—here, the automotive parts—must be an integral part of the automotive parts being produced. In other words, the automotive parts must be installed onto or into themselves and be an integral part of themselves. Autohaus’s contention that it may “produce” a good by installing that same good is an unreasonable construction of subsections 171.1012(a)(2) and (c)(1). Rather, for Autohaus to be able to receive a deduction for “installation” relative to the “production” of an automotive part, it must be installing some material onto or into that automotive part which becomes an integral part of the automotive part. For example, if Autohaus made a refurbished engine for the purpose of selling that engine to a customer, and in the course of making that engine it installed screws which became an integral part of that engine, Autohaus could claim the costs of the screws as materials used in the production of the engine and could claim the costs of labor to make that engine, including the labor to install the screws. But that is not the case here. Autohaus did not install anything onto or into the automotive parts to “produce” them; it simply acquired them by purchase. Autohaus’s act of installing purchased automobile parts onto or into customers’ automobiles as part of repairs is not the “production” of the automotive parts, but rather simply a mixed transaction involving both the sale of a good (the automotive 24 part) and the rendering of a service (the repair labor). Under the plain language of Comptroller Rule 3.588(c)(7), which was not challenged in this case, if “a transaction contains elements of both a sale of tangible personal property and a service, a taxable entity may only subtract as cost of goods sold the costs otherwise allowed by this section in relation to the tangible personal property sold”—in this case, its actual cost of purchasing the automotive parts. 34 TEX. ADMIN. CODE § 3.588(c)(7). Autohaus’s claim for a cost-of-goods-sold deduction for labor costs in “producing” automotive parts by installing them onto or into customer-owned automobiles should be denied. The portion of the trial court’s judgment granting Autohaus’s Chapter 112 claim seeking a refund of franchise taxes paid in protest and all relief granted thereunder should be reversed and a take-nothing judgment entered in favor of Appellants. D. Autohaus’s claim also fails under the application of Rule 3.588(b)(7), and the Rule is both valid and constitutional The above analysis demonstrates that Autohaus’s Chapter 112 claim fails even without the application of Comptroller Rule 3.588(b)(7) which Autohaus challenges. Autohaus’s claim also fails when the language of Comptroller Rule 3.588(b)(7) is applied, as Autohaus’s installation of the automotive parts did not occur “during the manufacturing or construction process” of the automotive parts, but during the course of repairs to customer’s automobiles. See 34 TEX. ADMIN. 25 CODE § 3.588(b)(7); CR 56; BFI Waste Systems of N. America, Inc. v. Martinez Envtl. Grp., 93 S.W.3d 570, 575 (Tex. App.—Austin 2002, pet. denied) (holding that valid agency rules have same force and effect as statutes). For this reason also, the portion of the trial court’s judgment on Autohaus’s Chapter 112 claim and all relief thereunder should be reversed and a take-nothing judgment entered in favor of Appellants. The trial court also declared that “Texas Comptroller Rule 3.588(b)(7) as it applies to the term “production” is unconstitutional and invalid.” CR 197, 346. As demonstrated infra in Issue IV, the trial court had no jurisdiction to consider Autohaus’s attempted declaratory judgment claim and that claim should be dismissed for want of jurisdiction. However, even if the trial court had jurisdiction to consider such claim, Autohaus’s challenges to the validity and constitutionality of the Rule fail on the merits. 1. Autohaus’s challenge to the Rule’s validity Autohaus argues that Rule 3.588(b)(7) is invalid because it includes the clarifying language “occurring during the manufacturing or construction process” in reference to “installation”—words which do not appear in the language of section 171.1012(a)(2). But, as discussed supra, the term “installation” as used in section 171.1012(a)(2) is ambiguous, the Comptroller may adopt rules that reasonably 26 clarify the terms used in a statute, and an adopted rule does not contradict a statute by the mere addition of words not existing in the statute. See Zimmer US, Inc., 368 S.W.3d at 586; Myers v. State, 169 S.W.3d 731, 735 (Tex. App.—Austin 2005, no pet.). Governmental agencies have a “unique understanding” of the statutes they administer, and a court will generally uphold an agency’s interpretation of a statute it is charged with enforcing so long as the construction is reasonable and does not contradict the plain language of the statute. R.R. Comm’n of Tex. v. Texas Citizens for a Safe Future & Clean Water, 336 S.W.3d 619, 625, 629 (Tex. 2011). The court “need not consider whether the Commission's construction is the only—or the best—interpretation in order to warrant [the court’s] deference,” but only whether the “agency’s interpretation of a statute it is charged with administering to be reasonable and in accord with the statute's plain language.” Id. at 628. “It is precisely when a statutory term is subject to multiple understandings that [a court] should defer to an agency’s reasonable interpretation” and thus where a “statutory scheme is subject to multiple interpretations, [a court] must uphold the enforcing agency’s construction if it is reasonable and in harmony with the statute.” Id. at 628, 629. In determining whether an agency’s interpretation is reasonable, a court begins with the language in the statute itself. Id. at 628. In determining legislative intent, a court must consider the statute’s meaning in the context of the entire 27 statute, not merely review words, phrases, or clauses in isolation. Id.; Myers, 169 S.W.3d at 733. Furthermore, courts should not construe a provision in a manner inconsistent or out of harmony with other provisions of the statute even though the provision might be susceptible to such a construction standing alone. Myers, 169 S.W.3d at 733–34. Words in a statute cannot be interpreted apart from their context, and in interpreting statutory terms, a court should consider the term’s meaning in the context of the entire statute. TGS-NOPEC Geophysical Co, 340 S.W.3d at 441. The existing ambiguity in section 171.1012 regarding the term “installation” could be argued to allow businesses to deduct the costs of services to customers as costs of goods sold, in contravention to the fundamental principles of section 171.1012 prohibiting the inclusion of services as part of a cost-of-goods-sold deduction. Indeed, this is precisely what Autohaus is attempting to do—deduct its costs for labor for maintenance and repair services on customer-owned automobiles as costs of goods sold. The Comptroller, anticipating such potential misapplications of the statute, adopted Rule 3.588(b)(7) to ensure that the Legislative intent of subsection 171.1012(a)(3)(B)(ii), prohibiting the inclusion of services as costs of goods sold, 28 was carried out. 4 The Comptroller has upheld that interpretation in Comptroller Decision 108, 124, Comptroller Decision 108, 125, and Comptroller Decision 108, 126, STAR Accession No. 201309781H, September 12, 2013 (holding that a taxpayer may not deduct labor charges for repair services as costs of goods sold, but may deduct labor related to producing body parts that it sells to end-use customers). Although “services” is not defined in the Tax Code, the Texas Supreme Court has recognized that it “includes generally any act performed for the benefit of another under some arrangement or agreement whereby such act was to have been performed.” Kirby Lake Develop., Ltd. v. Clear Lake City Water Auth., 320 S.W.3d 829, 839 (Tex. 2010) (internal quotations and citations omitted). Rule 3.588(b)(7) effectively precludes labor costs for installations performed “for the benefit of another,” i.e., installation services, from being deducted as costs of goods sold. This is in accordance with the legislative mandate that costs of providing services may not be deducted as cost of goods sold and ensures that 4 This rule has been in effect as long as section 171.1012 itself. See 32 Tex. Reg. 10034, 10034– 38 (2007); Act of May 2, 2006, 79th Leg., 3rd C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 13–16. The Legislature, although amending section 171.1012 in other respects in the interim, has never enacted any amendment that would negate the Comptroller’s interpretation of installation for the purposes of production as being only installation occurring during the manufacturing or construction process. 29 installation labor costs are only included as costs of goods sold when they are not performed as a service. Additionally, including the clarifying phrase “during the manufacturing or construction process” to the term installation as used in the context of production, ensures that the term installation will be interpreted in the same manner as the other actions included in “production”—construction, manufacture, development, mining, extraction, improvement, creation, raising, or growth—all of which describe actions in which the producer is bringing forth a product that it owns for ultimate sale, not an action performed as a service on behalf of another on property belonging to another. See TGS-NOPEC Geophysical, 340 S.W.3d at 441–42 (discussing the principle of statutory construction known as noscitur a sociis, or “it is known by its associates” that directs that similar terms be interpreted in a similar manner and applying it to terms in a statute); Hilco Elec. Coop., 111 S.W.3d at 81(“[W]hen words of a general nature are used in connection with the designation of particular objects or classes of persons or things, the meaning of the general words will be restricted to the particular designation.”); Combs v. Chapel Zenray, Inc., 357 S.W.3d 751, 758–60 (Tex. App.—Austin 2011, pet. denied) (discussing the interpretation of the words “attach” and “attaching” in the context of a tax statute and rejecting taxpayer’s “plain meaning” argument in favor of Comptroller’s narrow construction). Thus Rule 3.588 does not conflict with section 30 171.1012(a)(2), but rather acts to ensure that the interpretation of “installation” is consistent with the other provisions of section 171.1012, and is therefore a reasonable interpretation of section 171.1012 and a valid rule. Autohaus also argues that Rule 3.588(b)(7) is invalid because it contends that the Legislature, in section 171.1012(a)(2), intended for a taxable entity’s installation of an item onto or into another party’s personal property to constitute the “production” of that item for sale. As discussed supra, this argument is without merit because it relies on a misinterpretation of section 171.1012(a)(2) and (c)(1) that ignores the distinction between acquiring and producing a good for sale, the prohibition against deducting the cost of providing services, and most critically, the Legislature’s requirement that in the context of the production of goods, the business must own the property onto or into which materials are being installed in order for installation to constitute production. See TEX. TAX CODE §171.1012(c)(2), (a)(3)(B)(ii), (i). Rule 3.588(b)(7) does not conflict with section 171.1012 in this regard either, but rather serves to implement the Legislature’s intent by ensuring that only the labor costs of installing of materials into personal property owned by the business, and which is being produced for ultimate sale by the business, can be deducted as costs of goods sold. Because Rule 3.588(b)(7) is a reasonable interpretation of section 171.1012 and does not contradict the language of the statute, it is valid and must be upheld 31 and accorded deference by this Court. Texas Citizens, 336 S.W.3d at 628. Under the application of such Rule, Autohaus is not entitled to a refund of any franchise taxes for labor costs on customer-owned automobiles and its Chapter 112 claim fails. Additionally, Autohaus’s challenge to the validity of the Rule is without merit. Thus even if jurisdiction exists for a declaratory judgment regarding the Rule’s validity, the trial court’s judgment on this claim must be reversed and judgment rendered for Appellants. 2. Autohaus’s Constitutional Challenges to the Rule In its order granting summary judgment, and in its final judgment, the trial court also declared Rule 3.588(b)(7), as it applied to the term “production,” to be “unconstitutional,” without specifying which constitutional provisions the Rule violated. CR 197, 346. Autohaus’s motion for summary judgment contended that the Comptroller’s disallowance of Autohaus’s cost-of-goods-sold deduction for its labor costs in repairing customer-owned automobiles violates the Equal and Uniform Taxation Clause of the Texas Constitution (Tex. Const. art. VIII, § 1(a)), the Equal Protection Clause of the Texas Constitution (Tex. Const. art. I, § 3), the Equal Protection Clause of the United States Constitution (U.S. Const. amend. XIV, § 1), and the Due Process Clause of the United States Constitution (U.S. Const. amend. XIV, § 1). CR47–50. As these were the only constitutional challenges raised by Autohaus in its summary judgment motion, the trial court at 32 most could only have found that the Rule violated one or more of those constitutional provisions. See Stiles v. Resolution Trust Co., 867 S.W.2d 24, 26 (Tex. 1993)(holding that appellate court may not affirm summary judgment on ground not asserted in summary judgment motion). In reviewing taxation laws, courts indulge a strong presumption of constitutional validity. Upjohn Co. v. Rylander, 38 S.W.3d 600, 609 (Tex. App.— Austin 2000, pet. denied). The mandate under the Texas Constitution that all taxes be equal and uniform “requires only that all persons falling within the same class be taxed alike.” Id. Therefore, a litigant raising an equal and uniform taxation challenge must show that the State’s classification at issue has no rational basis. Texas Entm’t Ass’n, Inc. v. Combs, 431 S.W.3d 790, 800 (Tex. App.—Austin 2014, pet. denied), cert. denied sub nom, Texas Entm’t Ass’n Inc. v. Hegar, 135 S.Ct. 1568 (2015). The requirements under Equal Protection Clause of the United States Constitution and Equal and Uniform Taxation under the Texas Constitution are substantially the same and if a litigant’s Equal and Uniform Taxation challenge fails, so does any challenge based on the Equal Protection Clause of the U.S. Constitution or on the Equal Protection Clause of the Texas Constitution. Upjohn Co., 38 S.W.3d at 609; In re Nestle USA, Inc., 387 S.W.3d 610, 624 (Tex. 2012); Combs v. STP Nuclear Operating Co., 239 S.W.3d 264, 275 (Tex. App.—Austin 2007, pet. denied)(holding that challenges under Texas’s Equal Protection Clause 33 are evaluated using the same standard applied to challenges under the Equal Protection Clause of the U.S. Constitution). Autohaus asserted that disallowance of its claimed deduction violated its equal and uniform tax and equal protection rights because it created an irrational tax classification, not related to the differences in doing business that affect the value of privilege of doing business, and caused Autohaus to pay significantly more in franchise tax than other similarly situated taxpayers who produce tangible property for sale in the state. CR 8–9, 47–49. But Autohaus did not identify the “similarly situated taxpayers” it alleged were paying significantly less in franchise tax for performing services, nor did it present any evidence to support its constitutional contentions. As discussed supra, the Comptroller’s interpretation of section 171.1012, as applied in Rule 3.588(b)(7), implements the Legislature’s intent that businesses providing services cannot deduct service costs as costs of goods sold and that deductions for the production of goods are limited to the owners of the good being produced for sale in the ordinary course of business. All of the taxable entities that are similarly situated to Autohaus and provide mixed services by installing parts during the course of providing repair services on property belonging to their customers are treated equally and all such taxpayers are subject to the requirements of Rule 3.588(b)(7) and the Comptroller’s interpretation of section 171.1012. 34 If Autohaus is attempting to argue that it is being treated differently from taxpayers that install parts onto or into goods that such taxpayers own and produce for sale, this comparison will not lie because these are not similarly situated taxpayers. A taxpayer who owns a product and who installs materials onto or into that product as part of finalizing production so that the product may be sold in the ordinary course of business is clearly producing a product for sale as contemplated by section 171.1012 of the Tax Code and may therefore deduct its labor costs of producing the product. As discussed supra, Autohaus is not producing a product property for sale when it installs a purchased automotive part into a customer’s automobile during repair services, and so has no costs of production, but only costs of acquisition. The Legislature’s distinctions in section 171.1012 between those who purchase goods for sale and so have acquisition costs and those who produce goods and so have production costs, as well as its distinction between the sale of goods and the sale of services, are rational distinctions that directly affect the value of the privilege. The Comptroller’s application of Rule 3.588(b)(7) implements the purposes of section 171.1012, groups similar things and differentiates dissimilar things, and relates to differences in doing business that affect the value of the privilege. Rule 3.588(b)(7) therefore does not violate either the Equal and Uniform Taxation Clause of Texas Constitution or the Equal Protection Clauses of either the U.S. Constitution of the Texas Constitution. 35 Autohaus’s Due Process claim was based on its contention that “the Comptroller’s disparate treatment requires Plaintiff to pay more in tax than other taxpayers for the same right to do business enjoyed by other companies, which constitutes an unconstitutional deprivation of Plaintiff’s property without due process of law.” CR 50. However, as in its arguments regarding equal and uniform protection and equal protection, Autohaus did not identify what taxpayers would pay less in taxes, much less establish this by any evidence, nor did it identify how it was being treated disparately or being deprived of property without due process of law. As noted supra, Rule 3.588(b)(7) is based on section 171.1012, which makes rational distinctions between businesses which acquire goods for sale and those who produce goods for sale, and between producers of goods and service providers, and treats like-situated taxpayers similarly. Rule 3.588(b)(7) does not violate the Due Process Clause of the U.S. Constitution. Thus Rule 3.588(b)(7) does not violate any of the constitutional provisions complained of by Autohaus. It should be upheld, accorded deference by this court, and applied to Autohaus’s Chapter 112 claims, which fail thereunder. Additionally, because Autohaus’s constitutional challenges to the Rule are without merit, even if jurisdiction exists for a declaratory judgment regarding the Rule’s constitutionality, the trial court’s judgment on this claim must be reversed and judgment rendered for Appellants. 36 III. EVEN IF A TAXABLE ENTITY MAY DEDUCT LABOR COSTS FOR INSTALLING AUTOMOTIVE PARTS ONTO OR INTO CUSTOMER-OWNED AUTOMOBILES DURING REPAIRS AS COSTS OF GOODS SOLD, MATERIAL ISSUES OF FACT PRECLUDE THE GRANTING OF SUMMARY JUDGMENT AND THE AWARD OF A SPECIFIC REFUND AMOUNT ON AUTOHAUS’S CHAPTER 112 CLAIM. Summary judgment is only proper when the evidence shows that there are no issues of material fact and that movant is entitled to judgment as a matter of law. TEX. R. CIV. P. 166a(c). It is the movant’s burden to establish that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Nixon v. Mr. Prop. Mgmt. Co., Inc., 690 S.W.2d 546, 548 (Tex. 1985). In determining whether a disputed material fact issue exists, a trial court is to take as true all evidence favorable to the non-movant and indulge every reasonable inference and resolve all doubts in favor of the non-movant. Id. at 548–49. In this case, Autohaus failed to establish that it was entitled to summary judgment on the amount of refund that it sought. A material fact issue exists as to the existence and amount of the amount of both labor and material costs that were involved in the installation of automotive parts and thus the amount of any tax refund due. Autohaus’s Controller’s affidavit, an exhibit to Autohaus’s motion for summary judgment, unambiguously recognizes that there was some “de minimus amount” of labor costs that were not part of the costs of installing new or replacement automotive parts. CR57. That affidavit affirmatively acknowledges that part of the labor costs claimed in its costs-of-goods-sold deduction were not 37 deductible. CR57. There was also a conflict between that affidavit, which implies that costs of materials were disallowed, CR57, and that of the Comptroller’s auditor, Exhibit 1 to the Appellants’ cross-summary judgment motion, which stated that all costs of materials for which documentation was provided were allowed in the audit. CR128. Because material facts remains in dispute—the actual amount of deductible labor and the costs of materials which were disallowed and so subject to refund—summary judgment awarding the entire sum paid in protest is precluded. Moreover, the disallowed costs information provided by Autohaus on summary judgment—described as (1) SRV CUST LBR MB, (2) SRV WARR LAB M/B, (3) SRV SUBLET RPR M/B, (4) CUST LBR-MECH L/T, and (5) 4Y/50K MAINT MB with accompanying totals, see CR70—is insufficient to support the amount claimed by Autohaus as costs of goods sold as it does not specify what costs are included in such figures (labor, materials, other deductible costs, nondeductible costs?), nor does it segregate the labor costs involved in the installation of automotive parts from those labor costs that were not involved in the installation of automotive parts. Rather it simply lists all of the (unspecified) costs expended by Autohaus for service, labor, or maintenance performed on all customer automobiles by Autohaus or one of its subcontractors during the time period. While some of the costs in Autohaus’s categories may be labor and 38 material used in the installation of automobile parts, it is impossible to determine from the evidence presented on summary judgment what portion of the total costs in each category that is. Autohaus’s Controller’s affidavit likewise suggests that other costs are included in these broad categories as it refers to “all labor costs included” and “all material costs included,” in the Repair Costs and Subletting Costs, but does not specify what those amounts are nor does it state that the Repair Costs and Subletting Costs are exclusively comprised of labor and material costs. CR57. Autohaus therefore, failed to produce evidence of a vital fact and precisely quantify those labor and material costs that actually qualified for the cost-of-goods- sold deduction under its own theory of the case. By failing to segregate labor and material costs involving the installation of parts from labor or other costs that do not, and instead simply presenting all of its costs for service, maintenance, and repair of customer’s automobiles and seeking a refund for the same, Autohaus failed in its burden to establish the proper amount of refund and a material issue remains regarding what amount, if any, is due and payable. See TEX. TAX CODE §§ 112.060(a)(refund is limited to portion of money paid under protest which was unlawfully demanded and belongs to taxpayer); 111.104(a)(refund is limited to an amount of tax, penalty, or interest that has been unlawfully or erroneously collected). Further, conflicting evidence exists between the affidavits of the 39 Comptroller’s auditor and Autohaus’s Controller regarding whether there were any remaining disallowed material costs, and Autohaus’s Controller admitted that not all of the disallowed labor costs involved the installation of materials. Thus even Autohaus’s evidence establishes that the amount sought, and awarded to Autohaus, as a refund for costs of goods sold and accompanying interest, $14,227.09, includes some unspecified amount which was properly due and owning as tax, and therefore is not subject to refund. Taking as true all evidence favorable to the non-movant, and indulging every reasonable inference and resolving all doubts in favor of the non-movant, see Nixon, 690 S.W.2d at 548–49, a disputed material fact issue exists as to the amount of refund, if any, that is due. Where a disputed material fact issue exists as to the existence or amount of a tax refund, summary judgment is precluded. See El Paso Natural Gas Co. v. Strayhorn, 208 S.W.3d 676, 686 (Tex. App.—Texarkana 2006, no pet.). Autohaus failed to do more than raise a contested fact question as to the amount of any refund due, as it provided no factual support for its contentions that all of the disallowed labor costs involved the installation of materials and that the costs of any materials were disallowed, a claim contradicted by the Comptroller’s evidence. As a material fact exists, summary judgment for Autohaus on the amount of refund was not proper. Therefore, if this Court holds that Autohaus should 40 prevail on its Chapter 112 claim, the Court should reverse the trial court’s refund award on such claim and remand the case for a new trial on the proper amount of any refund. IV. THE TRIAL COURT HAD NO JURISDICTION TO CONSIDER AUTOHAUS’S ATTEMPTED CHALLENGE UNDER THE UNIFORM DECLARATORY JUDGMENT ACT TO COMPTROLLER RULE 3.588(B)(7) OR ITS REQUEST FOR ATTORNEYS’ FEES AND COURT COSTS BECAUSE AUTOHAUS’S CLAIM DID NOT FALL WITHIN THE SCOPE OF THE UDJA AND WAS, APART FROM THE ATTORNEYS’ FEES AND COURT COSTS REQUEST, REDUNDANT OF ITS CHAPTER 112 CLAIM. The trial court’s summary judgment order and final judgment include a declaration that “Texas Comptroller Rule 3.588(b)(7) as it applies to the term ‘production’ is unconstitutional and invalid,” and granted Autohaus attorneys’ fees. CR197–98, 346–47. Neither specifies the legal basis for the declaratory judgment or award of attorneys’ fees or costs, however, the only basis under which Autohaus’s declaratory judgment and attorneys’ fees and costs were sought was the UDJA. Autohaus claims that “[t]here is simply no other way to overturn an invalid regulatory provision” than an action under the UDJA. CR379 –80. But a challenge to the validity and constitutionality of an administrative rule does not fall within the scope of the UDJA. Nor is a challenge to the validity and constitutionality of a rule an ultra vires claim. The trial court therefore had no jurisdiction to grant declaratory relief, attorney’s fees, or court costs under the UDJA. Autohaus could have brought an action under section 2001.038 of the 41 Government Code, which explicitly provides for a declaratory judgment challenge to an administrative rule. But Autohaus chose not to do so, precluding declaratory relief on such basis. However, even if it had, the trial court would have had no jurisdiction to award any attorneys’ fees or court costs. Finally, Autohaus’s declaratory judgment claims were, aside from a request for an award of attorneys’ fees and court costs, redundant of its Chapter 112 claim, and so Autohaus was not entitled to declaratory relief under the UDJA or any award of attorneys’ fees or court costs. The trial court’s ruling on Autohaus’s attempted declaratory judgment claim and its award of attorneys’ fees and court costs should be reversed, and the attempted declaratory judgment claim should be dismissed for want of jurisdiction. A. A trial court may not grant a declaratory judgment regarding the validity and constitutionality of a rule under the UDJA, and therefore the trial court had no jurisdiction to grant a declaratory judgment nor attorney’s fees or court costs under the UDJA in this case. This Court granted Autohaus’s requested declaratory relief, finding that “Texas Comptroller Rule 3.588(b)(7) as it applies to the term ‘production’ is unconstitutional and invalid.” However, the UDJA, by its very terms, does not provide for the grant of a declaratory judgment regarding the validity of rules. See TEX. CIV. PRAC. & REM. CODE § 37.004(a). Section 37.004 relates exclusively to the construction or validity 42 of an “instrument, statute, ordinance, contract, or franchise and obtain a declaration of rights, status, or other legal relations thereunder.” Id.; Texas State Bd. of Vet. Med. Examiners v. Giggleman, 408 S.W.3d 696, 708 (Tex. App.—Austin 2013, no pet.). Further, to the extent that the UDJA applies to declaratory judgments against the State of Texas, it is limited to proceedings involving the validity and constitutionality of a “statute, ordinance, or franchise.” See TEX. CIV. PRAC. & REM. CODE § 37.006. Autohaus asserted below that because the trial court had to review and interpret tax statutes, particularly section 171.1012(a)(2), in making its determination on the validity of Rule 3.588(b)(7), Autohaus’s action seeking a declaratory judgment on the validity of a rule is governed by section 37.004. However, the mere fact that a court must review and construe a statute in the course of making a legal ruling does not convert such an action into a declaratory action that falls under the UDJA. See Giggleman, 408 S.W.3d at 708. Indeed, in ruling on Autohaus’s Chapter 112 claim, the trial court was required to review and construe section 171.1012, but that did not convert Autohaus’s Chapter 112 claim, for which no attorney’s fees may be awarded, into a UDJA action for which attorney’s fees may be awarded. This Court has roundly rejected similar arguments, calling such attempts the “very use of the UDJA—i.e., as a vehicle for 43 obtaining otherwise impermissible attorney’s fees—that the Texas Supreme Court squarely held impermissible[.]” Id. Even assuming arguendo that Autohaus’s interpretation of section 37.004 is correct and that any action in which a court must construe a statute falls within the scope of the UDJA, the Legislature has not waived sovereign immunity for all actions against the State that might fall within the scope of section 37.004. Rather, as against the State, the language of section 37.004 is further limited by that of section 37.006, which provides: In any proceeding that involves the validity of a municipal ordinance or franchise, the municipality must be made a party and is entitled to be heard, and if the statute, ordinance, or franchise is alleged to be unconstitutional, the attorney general of the state must also be served with a copy of the proceeding and is entitled to be heard. TEX. CIV. PRAC. & REM. CODE § 37.006(b). The Supreme Court has explained that section 37.006 waives sovereign immunity for challenges to the validity of an ordinance or statute. See Texas Dep’t of Trans. v. Sefzik, 355 S.W.3d 618, 622 (Tex. 2011); City of El Paso v. Heinrich, 284 S.W.3d 366, 373 n.6 (Tex. 2009). Autohaus did not challenge the validity of any statute or ordinance in this case, but rather argued that it is entitled to relief under the UDJA because “the Court determined a question of construction related to Texas Tax Code 171.1012(a)(2), which involves the associated Comptroller rule 3.588(b)(7).” CR231–32. This contention is incorrect. Autohaus did not seek a declaration on the 44 construction of a statute, and the trial court did not grant a declaration on the construction of a statute, but even if it had, the UDJA does not waive immunity for actions against the governmental entities which seek only the interpretation or construction of statutes or ordinances and do not challenge the validity of the statute or ordinance at issue. City of McKinney v. Hank’s Rest. Grp., L.P., 412 S.W.3d 102, 111–12 (Tex. App.—Dallas 2013, no pet.).5 Thus even if Autohaus’s action seeking a declaration on the validity of a rule could be recharacterized, as Autohaus asserted, as an action seeking a declaration on the construction of a statute, and even if the trial court’s ruling on the validity and constitutionality of a rule could be recharacterized as a declaratory ruling on the construction of a statute, Autohaus would not be entitled to any declaratory judgment regarding the construction of any statute under the UDJA, nor any attorney’s fees or costs for such an action, because there is no waiver of sovereign immunity under the UDJA for an action seeking a declaratory judgment on the construction of a statute nor for any attorney’s fees or costs for such an action. See 5 City of McKinney v. Hank’s Restaurant Group, L.P. involved a municipality so governmental immunity, not sovereign immunity was involved, but as is clear from the Court’s discussion, there is no difference in the analysis as applied to either sovereign or governmental immunity. See City of McKinney v. Hank’s Rest. Grp., L.P., 412 S.W.3d 102, 111–12 (Tex. App.—Dallas 2013, no pet.). 45 TEX. CIV. PRAC. & REM. CODE § 37.006(b); City of McKinney, 412 S.W.3d at 111 –12; Giggleman, 408 S.W.3d at 708–09. Sovereign immunity is waived under Texas Government Code section 2001.038(a) for actions seeking a declaratory judgment on the validity of a rule. TEX. GOV’T CODE § 2001.038(a). Sovereign immunity is not waived under the UDJA for actions seeking a declaratory judgment on the validity of a rule or for actions seeking a declaratory judgment on the construction, rather than the validity, of a statute. See TEX. CIV. PRAC. & REM. CODE §§ 37.004(a), 37.006(b); City of McKinney, 412 S.W.3d at 111–12; see also Sefzik, 355 S.W.3d at 622; Heinrich, 284 S.W.3d at 373, n.6. Since Autohaus sought relief only under the UDJA, sovereign immunity was not waived for the declaration that the trial court granted regarding the validity and constitutionality of Rule 3.588(b)(7). It follows then that if the trial court had no jurisdiction to render a declaratory judgment regarding the validity or constitutionality of Rule 3.588(b)(7) under the UDJA, it likewise had no jurisdiction to award attorney’s fees under section 37.009. See Giggleman, 408 S.W.3d at 708–09; TEX. CIV. PRAC. & REM. CODE § 37.009. Therefore the portion of the trial court’s judgment declaring Rule 3.588(b)(7) invalid and unconstitutional and awarding attorneys’ fees and court costs should be reversed and Autohaus’s claims seeking declaratory judgment and attorneys’ fees and court costs should be dismissed for want of jurisdiction. 46 B. Autohaus did not raise a claim within the ultra vires exception. The trial court likewise had no jurisdiction over Autohaus’s declaratory judgment claim under the ultra vires exception and its final judgment did not render a declaratory judgment on any ultra vires action. A declaratory judgment that a rule is invalid is not a declaratory judgment that a particular state officer has “acted without legal authority or failed to perform a purely ministerial act.” See discussion of ultra vires actions in Heinrich, 284 S.W.3d at 372. It is simply a declaratory judgment that a rule is invalid. The Legislature has provided a specific cause of action and waiver of sovereign immunity for a party that seeks to overturn an administrative rule—an action under Texas Government Code section 2001.038. Autohaus simply chose not to bring such an action. Furthermore, to the extent that Autohaus asserts that it was actually raising an ultra vires complaint that the Comptroller acted without legal authority or failed to perform a purely ministerial act, Autohaus provided no arguments, evidence, or authorities in the summary judgment proceedings to support such a complaint, but rather asserted that that (1) the Rule is invalid and unconstitutional (which does not raise a complaint about any particular action by any particular state actor); and (2) the Comptroller unconstitutionally disallowed its deduction and assessed additional tax liability against it. But any complaints regarding the Comptroller’s disallowance of Autohaus’s deduction and assessment of additional tax liability 47 would be wholly redundant of Autohaus’s complaints under its Chapter 112 claims and thus declaratory judgment on such complaints would not have been proper. See Giggleman, 408 S.W.3d at 707–09; and discussion infra in Section IV.D. Furthermore, the Texas Supreme Court recently clarified that a complaint that challenges a rule does not fall within the ultra vires exception. See Patel v. Texas Dep’t of Licensing & Regulation, 469 S.W.3d 69, 76–77 (Tex. 2015). C. While Texas Government Code section 2001.038 provides courts with jurisdiction to grant declaratory judgments regarding the validity of a rule, such provision does not provide for the award of attorneys’ fees or court costs. Thus even if Autohaus had raised such a claim, and the trial court had jurisdiction under section 2001.038 to grant a declaratory judgment on Rule 3.588(b)(7), it had no jurisdiction to award attorneys’ fees or court costs. Texas Government Code section 2001.038 explicitly provides courts with jurisdiction to enter a declaratory judgment regarding the validity of an agency rule. TEX. GOV’T CODE § 2001.038 (providing that the “validity or applicability of a rule . . . may be determined in an action for declaratory judgment if it is alleged that the rule or its threatened application interferes with or impairs, or threatens to interfere with or impair, a legal right or privilege of the plaintiff.”). Nevertheless, none of Autohaus’s pleadings raised any request for a declaratory judgement under section 2001.038, and Autohaus expressly disavowed seeking any declaratory relief under section 2001.038, asserting that it only raised declaratory judgment claims under the UDJA. CR232–33. Thus the trial court would have had no 48 jurisdiction to grant declaratory relief regarding the validity and constitutionality of Rule 3.588(b)(7) under Government Code section 2001.038. However, even if Autohaus had raised a claim challenging Rule 3.588(b)(7) under section 2001.038, and such claim was not redundant of its Chapter 112 claims (see discussion infra), the claim would have been without merit for the reasons discussed supra in II.D. Furthermore, section 2001.038, “unlike the UDJA, does not authorize attorney’s fees.” Giggleman, 408 S.W.3d at 708; see TEX. GOV’T CODE § 2001.038; see also discussion in City of San Antonio v. Shavano Ranch, No. 04-13-00623-CV, 2014 WL 631484, at *4–5 (Tex. App.—San Antonio Feb. 19, 2014, pet. denied)(mem. op.)(holding that even if a statute expressly provides for declaratory relief against State, a party bringing a declaratory judgment claim under that statute may not recover attorneys’ fees under the UDJA). Thus, even assuming arguendo that Autohaus had pled a section 2001.038 claim, and such claim was not redundant of its Chapter 112 claims, the trial court was not authorized to award attorneys’ fees or court costs. D. Autohaus may not recover attorneys’ fees or court costs for redundant claims that fall under the exclusive jurisdiction of Chapter 112. Additionally, the claims actually raised in Autohaus’s petition were redundant of its claims under Tax Code Chapter 112. Autohaus may not recover attorneys’ fees or court costs for declaratory actions which are inherently part of, 49 incidental to, or arise out of statutory claims for which the recovery of attorney’s fees was not permitted. See Jackson v. State Office of Admin. Hearings, 351 S.W.3d 290, 301 (Tex. 2011); MBM Fin. Corp. v. Woodlands Operating Co., L.P., 292 S.W.3d 660, 669–71 (Tex. 2009); and John G. and Marie Stella Kenedy Mem’l Found. v. Dewhurst, 90 S.W.3d 268, 289 (Tex. 2002). Furthermore, Chapter 112 “provides exclusive remedies for relief from assessed taxes on any basis.” Sanadco, Inc. v. Office of Comptroller, No. 03-11-00462-CV, 2015 WL 1478200, at *4 (Tex. App.—Austin March 25, 2015, pet. denied, motion for reh’g of pet. filed November 12, 2015)(emphasis in original). The Legislature has waived sovereign immunity for Chapter 112 claims. Autohaus could and did raise its complaints about constitutional violations in its Chapter 112 claim. Autohaus also raised a complaint under Chapter 112 regarding the validity of Rule 3.588, and the trial court could rule on the validity of Rule 3.588(b)(7) as part of its determination of Autohaus’s Chapter 112 claims. CR 14 (Autohaus’s protest letter raising grounds for Chapter 112 claims); TEX. TAX CODE § 112.053(b) (limiting the issues to be determined in the suit to those arising from the reasons expressed in the written protest as originally filed). The Legislature has also provided a specific waiver of sovereign immunity for plaintiffs seeking to challenge a regulatory provision that affects a plaintiff’s rights—Government Code section 2001.038. 50 But the Legislature did not provide a waiver of sovereign immunity for an award of attorney’s fees for claims under either Tax Code Chapter 112 or Government Code section 2001.038. To the extent that Autohaus has attempted to recast its Chapter 112 claims and its rule challenge or Rule 3.588(b)(7) as challenges under the UDJA, its efforts are no different than those by plaintiffs that were condemned by this Court and the Texas Supreme Court for misuse of the UDJA. See Jackson, 351 S.W.3d at 301; MBM Fin. Corp., 292 S.W.3d at 669–71; Giggleman, 408 S.W.3d at 708; Strayhorn v. Raytheon E-Sys., Inc., 101 S.W.3d 558, 571–73 (Tex. App.—Austin 2003, pet. denied). Furthermore, this Court has also recently held that attempts to be relieved of tax liability and penalties fall under the exclusive remedies of Chapter 112, even when framed as declaratory judgment challenges to rules, statutes, or ultra vires actions. Sanadco, 2015 WL 1478200, at *5. This Court explained that Chapter 112 provided three statutorily-permitted suits—suit after payment in protest, suit for injunction after paying or posting a bond, and a refund suit—and that aside from these three avenues of relief, Chapter 112 “‘allows no actions to challenge or seek refund of the taxes to which it applies,’ including declaratory judgment actions.” Id., quoting In re Nestle USA, Inc., 359 S.W.3d 207, 209–10 (Tex. 2012); see also TEX. TAX CODE § 112.108. This Court concluded that actions under the UDJA were preempted by Chapter 112. Id. at *4. 51 Thus, to allow Autohaus to receive declaratory relief under the UDJA and recover its attorneys’ fees and court costs in seeking a declaratory judgment regarding the validity and constitutionality of Rule 3.588(b)(7) in this case would not only be without statutory authority, but would permit the Autohaus to “frustrate the limits” that the Legislature intended by not permitting the recovery of attorneys’ fees or court costs for Chapter 112 claims and section 2001.038 claims, and allow Autohaus to do precisely what was expressly condemned by the Texas Supreme Court in MBM Financial, “to use the [UDJA] as a vehicle to recover otherwise impermissible attorney’s fees.” MBM Fin. Corp., 292 S.W.3d at 670, 669. Moreover, it would conflict with the Texas Supreme Court’s and this Court’s decision holding that the “only means by which a taxpayer may challenge the ‘applicability, assessment, collection, or constitutionality’” of a state tax is through a Chapter 112 action, not an action under the UDJA. Sanadco, 2015 WL 1478200, at *5 (emphasis in original), quoting Nestle, 359 S.W.3d at 209. E. Conclusion This Court should therefore reverse the trial court’s judgment granting a declaratory judgment on Rule 3.588(b)(7) and its grant of attorneys’ fees and court costs, and dismiss Autohaus’s declaratory judgment claims for want of jurisdiction. Alternatively, if this Court determines Autohaus’s declaratory judgment claim was not redundant of its Chapter 112 claim, or otherwise preempted by Chapter 112, 52 and that the trial court had jurisdiction to consider Autohaus’s rule challenge under Texas Government Code section 2001.038, this Court should reverse the trial court’s declaratory judgment ruling for the reasons set out supra in II.D, and reverse its award of attorneys’ fees and court costs, dismissing Autohaus’s claim for attorneys’ fees and court costs for want of jurisdiction. PRAYER For the foregoing reasons, Appellants pray this Court to reverse the judgment of the trial court, dismiss Autohaus’s declaratory judgment claims for want of jurisdiction, and render judgment against Autohaus on its Chapter 112 claim, or alternately remand for a new trial to determine the amount of any refund. In the alternative, if this Court does not reverse the trial court’s judgment on Autohaus’s Chapter 112 claim, Appellants pray this Court to reverse the portion of the judgment related to Autohaus’s declaratory judgment claims and dismiss Autohaus’s declaratory judgment claims for want of jurisdiction or, alternatively, dismiss Autohaus’s claims for attorneys’ fees and court costs for want of jurisdiction and modify the judgment accordingly. Respectfully submitted, KEN PAXTON Attorney General of Texas CHARLES E. ROY First Assistant Attorney General 53 JAMES E. DAVIS Deputy Attorney General for Civil Litigation ROBERT O’KEEFE Division Chief Taxation Division /s/ Cynthia A. Morales CYNTHIA A. MORALES Assistant Attorney General Financial Litigation and Charitable Trusts Division State Bar No. 14417420 P.O. Box 12548 Austin, Texas 78711-2548 Telephone: (512) 475-4470 Telecopier: (512) 477-2348 cynthia.morales@texasattorneygeneral.gov Counsel for Appellants Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas CERTIFICATE OF COMPLIANCE In compliance with Texas Rule of Appellate Procedure 9.4(i)(2), this brief contains 12,554 words, excluding the portions of the brief exempted by Rule 9.4(i)(1), as determined by the computer program used to prepare this document. /s/ Cynthia A. Morales Cynthia A. Morales Assistant Attorney General 54 CERTIFICATE OF SERVICE On December 14, 2015, this Appellants’ Brief was served electronically through the electronic filing manager and/or via email as shown below: David E. Colmenero dcolmenero@meadowscollier.com Alex Pilawski apilawski@meadowscollier.com MEADOWS, COLLIER, REED, COUSINS, CROUCH & UNGERMAN, L.L.P. /s/ Cynthia A. Morales Cynthia A. Morales Assistant Attorney General 55 APPENDIX APPENDIX TABLE OF CONTENTS Final Judgment (CR344–49) ..................................................................................... A Order Granting Plaintiff’s Motion for Summary Judgment (CR197–98) ................ B Order Denying Defendants’ Motion for Summary Judgment and Plea to the Jurisdiction (CR196) ............................................................................... C Affidavit of Autohaus Controller (CR56–57)........................................................... D Affidavit of Comptroller’s auditor (CR127–29)....................................................... E Listing of Disallowed Costs (CR70) ......................................................................... F Autohaus’s Protest Letter (CR71–74)....................................................................... G Tex. Tax Code § 171.1012 ........................................................................................ H 34 Tex. Admin. Code § 3.588 .................................................................................... I Tex. Tax Code § 112.052 ........................................................................................... J Tex. Tax Code § 112.053 .......................................................................................... K Tex. Tax Code § 112.060 .......................................................................................... L Tex. Tax Code § 111.104 ......................................................................................... M Tex. Const. art. VIII § 1 ........................................................................................... N Tex. Const. art. I § 3.................................................................................................. O U.S. Const. amend. XIV, § 1 .................................................................................... P Tex. Civ. Prac. & Rem. Code § 37.004 .................................................................... Q Tex. Civ. Prac. & Rem. Code § 37.006 .................................................................... R Tex. Civ. Prac. & Rem. Code § 37.009 .................................................................... S Tex. Gov’t Code § 2001.038..................................................................................... T Tex. Tax Code § 112.108 .......................................................................................... U APPENDIX A Final Judgment DC BK15125 PG47 Filed in The District Court of Travis County, Texas APR 29 2015 ~ Cause No. D-1-GN-13-000989 At l...{ ~ Y ;} fM. Velva L. PriCe, District Clerk AUTOHAUS LP, LLP § IN THE DISTRICT COURT § Plaintiff, § § v. § § 419th JUDICIAL DISTRICT GLENN HEGAR, COMPTROLLER OF § PUBLIC ACCOUNTS OF THE STATE § OF TEXAS, AND KEN PAXTON, § ATTORNEY GENERAL OF THE § STATE OF TEXAS § § Defendants. § TRAVIS COUNTY, TEXAS FINAL JUDGMENT On July 22, 2014, the Court granted Plaintiffs Motion for Summary Judgment and entered an Order that Plaintiff is entitled to: (1) include all of its labor costs associated with Repair Costs and all of its labor costs and materials costs associated with Subletting Costs involved in the installation of automotive parts in its cost of goods sold deduction; (2) a refund of the $14,227.09 in fi·anchisc tax that it paid in protest; (3) interest accruing on the amount of its refund claim in accordance with Texas Tax Code Section 111.064; and (4) attorneys' fees. The Court also detennined that Texas Comptroller Rule 3.588(b)(7) as it applies to the term "production" is unconstitutional and invalid. On that same date, the Court denied Defendant's Motion for Summary Judgment and Defendant's Plea to the Jurisdiction. Following the Court's Order of July 22, 2014, Defendants filed their Motion for Reconsideration of Trial Court's Rulings on Plaintiffs Motion for Summary Judgment, Defendants' Cross-Motion for Summary Judgment, and Defendants' Plea to the Jurisdiction, which was denied by the Court on October 30, 2014. On the 21st day of April, 2015, a trial was held before the Court to determine the amount Final Judgment- Page I Case # D-1-GN-13-000989 lllllllllllllllllllllllllllllllllllllllllllllllllllllll 004006590 344 DC BK15125 PG48 of attorneys' fees to be awarded, the amount of court costs, if any, to be awarded, and the statutory basis for any award of interest on the refund of $14,227.09 in franchise tax paid in protest. After receiving evidence and hearing arguments, the Court found that the following amounts of attorneys' fees were reasonable and necessary in pursuing Plaintiff's claim for declaratory relief at trial or are reasonable and necessary to defend the grant of Plaintiff's claim for declaratory relief on appeal: (1) $ 100,000 for amounts incurred through April19, 2015; (2) $ 1,600 for attorneys' fees associated with the trial on the amount of Plaintiff's award of Attorneys' Fees; (3) In the event Defendants file a Notice of Appeal and appeal this judgment to the Austin Court of Appeals and include an issue challenging the declaratory relief granted, $ 45,000 for responding to that issue and for oral argument on that issue if granted; (4) In the event that the Austin Court of Appeals denies relief on an issue challenging the declaratory relief granted and Defendants file a Petition for Rehearing or Petition for Rehearing En Bane with the Austin Court of Appeals seeking a rehearing or rehearing en bane on the appellate court's ruling on declaratory relief, $ 5,000 for responding to the pmtion of the Petition for Rehearing or Petition for Rehearing En Bane regarding the ruling on the challenge of the declaratory relief granted. (5) In the event Defendants file a Petition for Review with the Texas Supreme Court and raise an issue for review challenging the declaratory relief granted, $ 6,000 for preparing and filing a Response to the issue raised in the Petition for Review challenging the declaratory relief granted. (6) In the event the Texas Supreme Court orders full briefing on an issue raised in the Petition for Review challenging the declaratory relief granted, $ 18,000 to brief such issue. (7) If the Texas Supreme Court requires oral argument on an issue raised in the Petition for Review challenging the declaratory relief granted, $ 6,000 to prepare and argue such issue. Final Judgment-· Page 2 345 DC BK15125 PG49 (8) In the event Defendants file a Petition for Rehearing or Petition for Rehearing En Bane with the Texas Supreme Court seeking a rehearing or rehearing en bane on an issue raised for review challenging the declaratory relief granted, $ 6,000 for responding to such issue. (9) All appellate attorneys' fees awarded herein are expressly conditioned on Plaintiff prevailing on the respective appeal. The Court further found that court costs in this case were $274.80 and awarded Plaintiff that amount in court costs. The Court further found that the proper statutory basis for any award of any interest on the refund of$14,227.09 in franchise tax paid in protest, is Texas Tax Code§ 112.060 and Texas Tax Code§ 112.058(a)(4). Based on the Court's June 22, 2014 ruling on Plaintiffs Motion for Summary Judgment, its ruling on April 21, 2015, regarding reasonable and necessary attorney's fees, court costs, the proper statutory basis for any award of interest on the refund of $14,227.09 in franchise tax paid in protest, and the legal and equitable powers of the Court, Final Judgment is hereby rendered against Defendants, Glenn He gar, successor to Susan Combs, Comptroller of Public Accounts of the State of Texas and Ken Paxton, successor to Greg Abbott, Attorney General of the State of Texas and in favor of Plaintiff Autohaus LP, LLP. It is therefore ORDERED, ADJUDGED, AND DECREED that Plaintiff have and recover from Defendants the following specific relief: A. Plaintiff is entitled to include all of its labor costs associated with Repair Costs and all of its labor costs and materials costs associated with Subletting Costs involved in the instAllAtion of Antomo1iw~ pilrts in its cost of' ennrls solei rlerlnc:tion. B. Texas Comptroller Rule 3.588(b)(7) as it applies to the term "production" is unconstitutional and invalid. Final .Judgment- Page 3 346 DC BK15125 PG50 C. Plaintiff is entitled a refund of the $14,227.09 in franchise tax that it paid in protest. D. Plaintiff is entitled to interest accruing on the amount of its refund claim as provided under Texas Tax Code§ 112.060 and Texas Tax Code§ 112.058(a)(4). E. Plaintiff is awarded court costs in the amount of$274.80. F. Plaintiff is awarded reasonable and necessary attomeys' fees incuned in pursuing its claim for declaratory relief through the entry of Final Judgment of$ 100,000 for amounts incurred through April 19, 2015. In addition, Plaintiff is entitled to an additional $ 1,600 for attomeys' fees associated with the trial on the amount of its award of Attorneys' Fees. G. In the event Defendants file a Notice of Appeal and appeal this judgment to the Austin Court of Appeals and include an issue challenging the declaratory relief granted, Plaintiff is awarded additional reasonable and necessary attorneys' fees of$ 45,000 for responding to that issue and oral argument on that issue if granted. In the event that the Austin Comi of Appeals denies relief on an issue challenging the declaratory relief granted and Defendants file a Petition for Rehearing or Petition for Rehearing En Bane with the Austin Comi of Appeals seeking a rehearing or rehearing en bane on the appellate court's ruling on declaratory relief, Plaintiff is awarded additional reasonable and necessary attorneys' fees of $ 5,000 for responding to the portion of the Petition for Rehearing or Petition for Rehearing En Bane regarding the ruling on the challenge of the declaratory relief granted. In the event Defendants file a Petition for Review with the Texas Supreme Court and raise an issue for review challenging the declaratory relief granted, Plaintiff is awarded additional reasonable and necessary attorneys' fees of $ 6,000 for preparing and filing a Response to the issue raised in the Petition for Review challenging the declaratory relief granted. In the event the Texas Supreme Court orders full briefing on an issue Final Judgment- Page 4 347 DC BK15125 PG51 raised in the Petition for Review challenging the declaratory relief granted, Plaintiff is awarded additional reasonable and necessary attorneys' fees of$ 18,000 to brief such issue. If the Texas Supreme Court requires oral argument on an issue raised in the Petition for Review challenging the declaratory relief granted, Plaintiff is awarded additional reasonable and necessary attorneys' fees of $ 6,000 to prepare and argue such issue. In the event Defendants file a Petition for Rehearing or Petition for Rehearing En Bane with the Texas Supreme Court seeking a rehearing or rehearing en bane on an issue raised for review challenging the declaratory relief granted, Plaintiff is awarded additional reasonable and necessary attorneys' fees of$ 6,000 for responding to such issue. All appellate attorneys' fees awarded herein are expressly conditioned on Plaintiff prevailing on the respective appeal. All other relief not expressly granted herein is denied. This judgment finally disposes of all claims and all parties and is appealable. IT IS SO ORDERED. SIGNED this ~ qday of..,.,L-------ir:r---=---'' 2015. :L-4- \~ ~ur-\-'r.e.r orde..'e~ -\-~a.-\- +~e_'''Pc-oros~O.. F~("\Q,\ -:::Ju.d?\rt\e.f\-\- ~ s\~'1\ed. o~ -\"'e_ Co~c-\- oC"\ ~\ \ '2. \ 20\5 \ ~ '\fP\(_1\\Et5 . Final Judgment- Page 5 348 DC BK15125 PG52 APPROVED AS TO FORM ONLY; DEFENDANTS DISAGREE WITH THE SUBSTANCE OF THE JUDGMENT AND INTEND TO CHALLENGE THE JUDGMENT ON APPEAL: Cynthia A. Morales State BarNo. 14417420 Assistant Attorney General Financial Litigation, Tax, and Charitable Trusts Division P.O. Box 12548 Austin, Texas 78711-2548 (512) 475-4470- Direct Line (512) 477-2348 -Fax cynthia.morales@texasattorneygeneral.gov ATTORNEYS FOR DEFENDANTS State Bar No. 24074194 JASON B. FREEMAN State Bar No. 24069736 AI"EX .J. PILA WSKI State Bar No. 24074899 MEADOWS, COLLIER, REED, COUSINS, CROUCII & UNGERMAN, L.L.P. 901 Main Street, Suite 3700 Dallas, TX 75202 (214) 744-3700 Telephone (214) 747-3732 Facsimile dcolmenero@meadowscollier.com tfarhing@meadowscollier.com jfreeman@meadowscollier.com apilawski@meadowscollier.com ATTORNF.YS FOR PT,ATNTTFF Final JLidgmcnt- Pc1ge 6 349 APPENDIX B Order Granting Plaintiff’s Motion for Summary Judgment Notice sent: €!Jfo1 Interlocutory None DC BK14205 PG1331 Disp Parties: ~ Disp code:(@CLS-"~.~ =!:WJJ-=--\;-Q-- Redact pgs: filed In The District Coun @~Travis County, Texas Judge-tl'(~-·- C1erk::tf) Cause No. D-1-GN-13-000989 AUTOHAUS LP, LLP § § Plaintiff, § § v. § 419th JUDICIAL DISTRICT § SUSAN COMBS, § COMPTROLLER OF PUBLIC § ACCOUNTS OF THE STATE OF § TEXAS and GREG ABBOTT, § TRAVIS COUNTY, TEXAS ATTORNEY GENERAL OF THE § STATE OF TEXAS § § Defendants. § ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT Before the Court is Plaintiff Autohaus LP, LLP's Motion for Summary Judgment. Upon consideration of the same, Defendants' Response, Plaintiffs Reply, and the arguments of counsel, the Court is of the opinion that the motion is meritorious, and should be GRANTED in its entirety. IT IS THEREFORE ORDERED that (i) Plaintiff is entitled to include all of its labor costs associated with Repair Costs and all of its labor costs and materials costs associated with Subletting Costs involved in the installation of automotive parts in its cost of goods sold deduction; (ii) Plaintiff is entitled to a refund of the $14,227.09 in franchise tax that it paid in protest; (iii) Texas Comptroller Rule 3 .588(b)(7) as it applies to the term "production" IS unconstitutional and invalid; (iv) Plaintiff is entitled to interest accruing on the amount of its refund claim as I 197 DC BK14205 PG1332 provided under Texas Tax Code Section 111.064; and (v) Plaintiffs is entitled to attorneys' fees. Signed this the~ day o JUDGE PRESIDING 445995 2 198 APPENDIX C Order Denying Defendants’ Motion for Summary Judgment and Plea to the Jurisdiction - --- ------- - - - - - - - - - - - - - - Notice sent: Final Interlocutory DC BK14206 PG4 Disp Parties: filed in The District Court ----------~---- Disp code: CVD I CLS (f)f Tl!'avis Countyl Texas --r--- CAUSE NO. D-1-GN-13-000989 Redact pgs: _ _ Judge \)'{6 --=-Cl/~\';;;-q- AUTOHAUS LP, LLP § IN THE Plaintiffs § § v. § OF TRAVIS COUNTY, TEXAS § SUSAN COMBS, COMPTROLLER OF § PUBLIC ACCOUNTS OF THE STATE § OF TEXAS, and GREG ABBOTT, § 419TH JUDICIAL DISTRICT ATTORNEY GENERAL OF TEXAS Defendants. ORDER DENYING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT AND PLEA TO THE JURISDICTION On July 9, 2014, the Court heard Plaintiffs Motion for Summary Judgment and Defendant's Response to Plaintiffs Motion for Summary Judgment, Cross Motion for Summary Judgment and Plea to the Jurisdiction. After due consideration, the Court issued a separate order on Plaintiffs Motion for Summary Judgment dated today and the Court rules as follows on Defendant's Cross Motion for Summary Judgment and Plea to the Jurisdiction: It is hereby ORDERED that Defendants' Objection to Plaintiffs Exhibit 1 ~ 6-11 is OVERRULED. It is further ORDERED that Defendants' Motion for Summary Judgment and Defendants' Plea to the Jurisdiction are hereby DENIED. IT IS SO ORDERED. SIGNED on th~day of July, 2014. DARL 'NE BYRNE PRESIDING JUDGE 196 APPENDIX D Affidavit of Autohaus Controller Cause No. D-1-GN-13-000989 AUTOHAUS LP, LLP § IN THE DISTRICT COURT § Plaintiff, § § v. § 419th JUDICIAL DISTRICT § SUSAN COMBS, § COMPTROLLER OF PUBLIC § ACCOUNTS OF THE STATE OF § TEXAS and GREG ABBOTT, § TRAVIS COUNTY, TEXAS ATTORNEY GENERAL OF THE § STATE OF TEXAS § § Defendants. § AFFIDAVIT OF RICHARD BURGER STATE OF TEXAS § § COUNTY OF DALLAS § Before me, the undersigned authority, on this date Richard Burger, and being duly sworn, stated under oath: 1. My name is Richard Burger. I am of sound mind, capable of making this affidavit, and personally acquainted with the facts herein stated: 2. I am the Controller atAutohaus LP, LLP. 3. Autohaus LP, LLP is an automotive dealership organized as a limited liability partnership and headquartered in Plano, Texas. t' ~.. 4. Autohaus LP, LLP computed its Texas franchise tax for the 2009 report year by !· deducting cost of goods sold. A true and correct copy of Autohaus LP, LLP's 2009 Texas ~; Franchise Tax Report is attached as Exhibit "A" to this affidavit. 5. Autohaus LP, LLP's cost of goods sold deduction for the 2009 report year included costs r ! 1 incurred in selling automobiles C'Sales Costs"), costs incurred in repairing automobiles i. ;·'·· ("Repair Costs"), and costs incurred in subcontracting such repair work to others [: ("Subletting Costs"). i I I L. I 1 442312 I ! Ex. 1 56 I ••••• ·-···. ·-·-·•• ·.·-·- • : ••• ·.;.;._. ·.:; .:·.·>:-::: ·. I_ __.:__• :·.~.-.·· ··: .. ·-:-:;.. :! : :·:-:-:-:··,·_.·.·.· 6. Autohaus LP, LLP's Repair Costs for the 2009 report year encompassed costs attributable to labor and materials. 7. Autohaus LP, LLP's Subletting Costs for the 2009 report year encompassed costs attributable to subcontracted labor and materials. 8. Except for de minimis amounts, all of Autohaus LP, LLP's labor costs included in Repair Costs represent the costs of installing new or replacement automotive parts. 9. Except for de minimis amount, all of Autohaus LP, LLP's subcontracted labor costs included in Subletting Costs represent the costs of installing new or replacement automotive parts. 10. Autohaus LP, LLP's labor costs attributable to installing new or replacement automotive parts involves integrating automotive parts into automobiles so that the parts are set up and ready for use in the automobiles. 11. All of Autohaus LP, LLP's materials costs included in its Repair Costs and Subletting Costs represent costs of acquiring and producing goods that were sold. SUBSCRIBED AND SWOR;N TO BEFORE ME on this J, 2 day of May, 2014, to certify which, witness my hand and official seal. i~.~~~'?,/1,,,__ TONYA LEANNE FOREMAN ff"~~1o~ Notary Public, state of Texas %vi.·~P~./!f!f "'-lJ;r,;... ACCOUNTING YEAR ENDING 12/31/200& ****************************************;***** **** ***************** ***************************;;¥;;;;;;;;~******************** REPORTED COST OF GOODS SOLD $122,21 0,985 ===========~~======~~======~===~ --·------·----FROM THE FRANCHISE TAX REPORTS---··-------·· DISALLOWED COSTS SRV CUST LBR MB 1,105,775 SRV WARR LBR M/8 352,454 SRV SUBLET RPR M/B 746,582 CUST LBR-MECH Ltr 173,933 4Y/50KMAINTMB 102,559 TOTAL DISALLOWED COSTS [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4069812. Public record. Not legal advice.