On March 13, the Texas Supreme Court issued a decision in NuStar Energy, L.P. v. Comptroller of Public Accounts of the State of Texas that rejected the taxpayer’s ultimate destination sourcing method as applied on NuStar’s Franchise Tax refund claims. The Texas Supreme Court provided clarity that when sourcing receipts from sales of tangible personal property for Texas Franchise Tax apportionment purposes, the location of where the purchaser takes possession or delivery of the product is controlling and not where the purchaser ultimately transports the products for use or further distribution or sales.   

Background 

NuStar is based in Texas and sells high-sulfur bunker fuel for use in large, oceangoing ships. The company delivers fuel to its customers (primarily foreign-registered vessels) which pick up the fuel at Texas ports. When NuStar filed its original Franchise Tax reports, it treated the above-referenced sales as Texas receipts to be included in the receipts factor numerator due to being delivered in Texas. Subsequently, NuStar requested a $2.4 million Franchise Tax refund based on excluding the bunker-fuel sales from the numerator of its Texas receipts factor because the nonresident vessels and their owners in fact do not (and legally cannot) use, sell, or consume bunker fuel in Texas or Texas waters. NuStar argued sales receipts are attributable to the market for the seller’s goods as determined by the destination where the buyer intends to use, sell, or otherwise dispose of the property. In the case of receipts from the sale of bunker fuel, NuStar argued that ultimate destination would be outside of Texas.

Court decision

The Texas Supreme Court rejected NuStar’s ultimate destination approach and accepted the Comptroller’s argument for a place of delivery/transfer test. The Court primarily focused on the relevant statutory language and interpreted it to require sourcing associated receipts based on where a purchaser takes possession or delivery of the tangible products at issue. The Court also mentioned that NuStar’s sourcing methodology would potentially create “more complex administrative, practical, and recordkeeping burdens related to ascertaining and documenting a buyer’s post-acquisition journey to the place of consumption or use.” While ruling in favor of the Comptroller, the Court did acknowledge that the opposite conclusion has been reached in several cases from different states around the U.S. when analyzing similar statutory language. 

What does CohnReznick think?

The NuStar holding makes clear that Texas is not an ultimate destination state for Franchise Tax sourcing purposes and could create exposures for companies that used an ultimate destination method to source receipts outside of Texas on prior-year Franchise Tax reports. Alternatively, the ruling could create refund opportunities for companies that used an ultimate destination method to source receipts to Texas when the products were initially transferred to the purchaser in another state and subsequently transported to Texas. Companies may also have to evaluate their past and prospective nexus determinations and apportionment for Texas Franchise Tax purposes because of the decision.