Income/Franchise:
Texas: Labor Costs for Repairing Customer-Owned Parts are Not Includable within Cost of Goods Sold
Hearing No. 116,007, Tex. Comptroller of Public Accounts (1/24/24). In a ruling involving a taxpayer providing aircraft instruments along with accessory services and support, the Texas Comptroller of Public Accounts (Comptroller) held the taxpayer’s labor costs for repairing defective parts sent by customers for essential repairs were not includable within cost of goods sold (COGS) for Texas franchise tax purposes. Absent an exception, a taxable entity is only eligible to include within Texas COGS costs related to goods the entity owns under state law (see Tex. Tax Code § 171.1012(i)). As explained by the Comptroller, the taxpayer here performed repairs on:
Already-completed aircraft parts, and
Customer-owned aircraft parts; further, the taxpayer did not in any way modify, make, or complete distinguishable parts as a result of the repairs.
As such, the labor repair costs were determined to not be a cost to produce the parts ultimately sold by the taxpayer. Please contact us with any questions.
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