Background
Toro Rojo, Inc. is a transportation company that hauls demolition and construction waste to landfills. Casco Hauling and Excavating Co., a subsidiary of Toro Rojo’s parent, operates a landfill for demolition and construction waste. For franchise-tax report years 2008 and 2009, both companies calculated their franchise-tax liabilities using the cost-of-goods-sold (COGS) deduction under Texas Tax Code § 171.1012(i), which allows a taxable entity that “furnishes labor or materials to a project for the construction or improvement of real property” to be treated as an “owner” of that labor or materials and to include those costs in its COGS deduction. The Comptroller disagreed and, following an audit, applied the E-Z Computation instead, assessing additional franchise taxes of approximately $30,885.
The companies paid the additional tax under protest and filed a tax-protest suit under Tax Code Chapter 112 seeking a refund. They later amended to add a claim under the Uniform Declaratory Judgments Act (UDJA) seeking a broad declaration that their business operations—hauling and disposing of construction waste—constitutes an “improvement of real property” such that the COGS deduction applies in all years, not just the years at issue. The case proceeded to a jury trial in October 2023. The jury found that the companies had furnished labor to real property improvement projects and determined specific COGS amounts for each year. The district court nonetheless entered a take-nothing judgment against both companies on the refund claims. It also denied the UDJA declaratory relief. Both parties appealed.
The Court’s Holding
The Fifteenth Court of Appeals affirmed the district court’s judgment on both issues.
On the refund claims, the court explained that the jury’s COGS findings did not automatically entitle the companies to a refund. Under the franchise-tax scheme, the COGS deduction reduces “total revenue” to arrive at “margin,” which is then apportioned to yield “taxable margin.” Although the jury found specific COGS amounts, when those amounts were applied to the actual franchise-tax computation for the 2008 and 2009 report years, the resulting tax liability was equal to or greater than the amount the companies had already paid—including the protest payment. Because no net overpayment resulted, the take-nothing judgment on the refund was proper.
On the UDJA declaratory relief, the court held the claim was barred by sovereign immunity. The UDJA does not waive sovereign immunity for claims seeking a declaration of rights under a statute—only for claims that challenge the validity of a statute or ordinance, or that fit within the narrow ultra vires exception. Tex. Dep’t of Transp. v. Sefzik, 355 S.W.3d 618 (Tex. 2011). To invoke the ultra vires exception, a plaintiff must show the official acted outside the scope of his authority or performed a purely ministerial act incorrectly. Houston Belt & Terminal Ry. v. City of Houston, 487 S.W.3d 154 (Tex. 2016). Here, the Comptroller’s examination and determination of franchise-tax liability involves broad statutory discretion—the Tax Code authorizes the Comptroller to adopt regulations and assess taxes as he deems necessary. Because the COGS eligibility determination was a discretionary act, the companies could not invoke the ultra vires exception, and sovereign immunity barred the UDJA claim.
Key Takeaways
- A favorable jury verdict on COGS eligibility under Tax Code § 171.1012(i) does not automatically yield a franchise-tax refund; the jury’s amounts must be applied to the actual franchise-tax computation, and if the resulting liability equals or exceeds what was already paid, no refund is due.
- The UDJA does not waive sovereign immunity for taxpayers seeking a forward-looking declaration of COGS eligibility; a claim targeting the Comptroller’s discretionary tax determination does not qualify as either a validity challenge or an ultra vires claim.
- Businesses hauling demolition and construction waste may be eligible for the § 171.1012(i) COGS deduction as entities that “furnish labor to a project for the improvement of real property,” but they must demonstrate the deduction actually reduces their net franchise-tax liability below what was already paid to recover a refund.
Why It Matters
For Texas contractors, waste management companies, and other businesses that provide services “at the site” of real property improvement projects, Toro Rojo confirms that the § 171.1012(i) COGS deduction is available but warns against assuming it will always produce a refund. The interaction between COGS amounts, the total-revenue calculation, and apportionment can produce results that neutralize or eliminate refund eligibility even when the underlying COGS deduction is valid. Careful pre-litigation modeling of the full franchise-tax computation is essential before paying under protest and suing for a refund.
The sovereign immunity holding also reinforces a significant limitation on UDJA-based declaratory relief in tax disputes. Taxpayers who want a broad ruling about their rights in future tax years cannot use the UDJA to sidestep immunity absent a genuine ultra vires claim or statutory validity challenge. The proper vehicle for prospective franchise-tax clarity remains the Comptroller’s letter-ruling process or an agreed-case certification to the Supreme Court—not a declaratory judgment action.