By Elizabeth Cha and Scott Wright
The Texas Court of Appeals held that a seismic data gathering company was entitled to a cost of goods sold (COGS) deduction for costs of labor and materials incurred to acquire and process seismic data for its clients. Pursuant to Tex. Tax Code § 171.1012(i), a taxpayer may include costs from “furnishing labor or materials to a project for the construction … of real property” in its computation of COGS. The Comptroller had denied the taxpayer’s COGS deduction because the Comptroller characterized the taxpayer as a service provider to companies engaged in the exploration and production of real property (i.e., oil and gas wells). The court rejected this view and agreed with the taxpayer’s position that its activities satisfied the statute because the taxpayer’s seismic services and products were integral to the customer’s oil well drilling process. Hegar v. CCG Veritas Serv. (U.S.) Inc., No. 03-14-00713-CV (Tex. App. Third Dist. Mar. 9, 2016).