Income/Franchise:
Texas: Timber Company’s Road Construction and Maintenance Costs Eligible for COGS

Letter No. 202502030L, Tex. Comptroller of Public Accounts (2/28/25). In a ruling involving a timber company, the Texas Comptroller of Public Accounts (Comptroller) determined the company’s costs of constructing and maintaining logging roads qualify as deductible cost of goods sold (COGS) under Tex. Tax Code section 171.1012(c)(4) related to inbound transportation costs, along with the corresponding depreciation costs under Tex. Tax Code section 171.1012(c)(6), for purposes of the Texas franchise tax margin calculation. The Comptroller explained that when the company extracted and processed the timber into lumber and windows, the company was producing goods that it ultimately sold. Moreover, the company’s ability to move the timber from the extraction site to its manufacturing facility required properly constructed logging roads; similar to transporting goods between a taxpayer’s storage facilities, the company at issue transported the timber from the extraction site to the next step in processing (i.e., its manufacturing facility), which was operated by a member of the Texas combined filing group. Given the costs to construct and maintain the logging roads were attributable to the transportation of goods to the company’s manufacturing facility to process the timber, the costs qualified as inbound transportation costs. Additionally, the logging roads provided access to and were necessary for the extraction and production of the lumber and windows; therefore, to the extent the company depreciated the costs associated with the construction and maintenance of the logging roads on its federal income tax return, those costs were also eligible to be included within COGS for Texas franchise tax purposes subject to any required adjustments (e.g., disallowance of bonus depreciation). Please contact us with any questions.