AUSTIN, Texas (CN) — A Texas Court of Appeals reversed a trial court ruling and increased the state tax refund a movie chain may receive for showing films, opening the door for other movie chains to seek similar refunds.
Third District Court of Appeals Judge Melissa Goodwin on Friday withdrew the Third District’s judgment of April 30, 2015 and issued a substitute ruling. She affirmed the trial court ruling that American Multi-Cinema (AMC) could deduct its exhibition costs from its franchise taxes.
Most importantly, Goodwin reversed the trial court’s phase two ruling and increased the amount of facility-related costs AMC could include in its cost of goods sold (COGS) deduction by hundreds of thousands of dollars.
AMC sued former Texas Comptroller Susan Combs and Attorney General Greg Abbott (now Texas governor) in two lawsuits in Travis County Court in December 2012.
AMC sought refunds for franchise taxes it paid under protest for 2008 and 2009. The court consolidated the cases.
AMC claimed the comptroller erroneously disallowed its COGS tax deduction for the “cost of acquiring, producing and use of motion picture films.” The costs included licensing fees, film freight, utilities, depreciation, rent and real estate taxes.
Phase one of the bench trial centered on whether AMC’s film product is a “good” under the Texas Tax Code.
The comptroller argued that AMC was not a film producer or distributor and that its customers do not purchase goods, but rather “the right to observe the movie in the theater.”
The trial court disagreed and said AMC was entitled to include the costs to exhibit films to its customers in its COGS tax deductions.
The second part of the bench trial involved facility-related costs associated with the square footage of AMC’s movie theaters that it could include in its COGS deduction.
AMC said it should be able to include costs from the entire square footage of its auditoriums in the COGS calculation. This amounted to $579,656 for 2008 and $591,293 for 2009.
The comptroller said that only the square footage occupied by the speakers and the screens in the auditoriums should be allowed as deductions. This would mean AMC was entitled to a refund of only $229,709 for 2008 and $269,959 for 2009.
The trial court agreed with the comptroller here. The comptroller then appealed the trial court’s phase one ruling, and AMC appealed the phase two verdict.
On Friday, Judge Goodwin disagreed with the comptroller, that AMC does not sell the film, but the right to watch the film at a certain time and place.
“The comptroller focuses on the customer’s purchase of a ticket, which the comptroller contends is a license, and the fact that AMC’s customers leave AMC’s theaters with experiences and memories but without a copy of the film. … But the definitions of ‘tangible personal property’ in section 171.1012 do not have a take-home requirement,” Goodwin wrote.
The judge said AMC gave sufficient evidence that its films meet the definition of “tangible personal property” under the tax code. As a result, the trial court was correct to conclude that AMC is entitled to include its exhibition costs in its COGS calculation.
As to AMC’s appeal of the tax refund, Goodwin focused on AMC’s use of its auditorium space in the “production” of films.
“AMC’s witness also answered ‘Yes’ when asked if the auditorium was ‘directly used for production.’ He further described the auditorium space as ‘an acoustic chamber,’ ‘production area’ and ‘controlled environment with multi dimensional surround audio’ and testified that ‘there is creation going on in that auditorium in near realtime,’” the ruling states.
The comptroller argued that movie auditoriums are only consumption space, not production space. Under that interpretation, the film is produced in the screens and speakers and “experienced, not produced, in the auditoriums.”
Goodwin noted that the comptroller “did not call any witnesses to rebut AMC’s evidence or otherwise present evidence during phase two regarding the design and function of AMC’s auditorium space to support his factual assertions.”
She said the plain text of the tax code does not support the comptroller’s theory that production space and consumption space are mutually exclusive.
“AMC’s evidence established that its costs associated with the square footage of its auditoriums are direct costs of producing its product, and the comptroller failed to present controverting evidence. Thus, we sustain AMC’s issue and, based on the parties’ stipulations as to AMC’s calculation of the amount of refund owed, render the judgment that the trial court should have rendered.”
As a result, AMC is entitled to a $579,656 refund for report year 2008 and $591,293 for report year 2009.
AMC attorney Eric Stein, with Ryan Law, said the ruling could allow other theaters to use a similar method in claiming tax deductions.
“Because the appellate court determined that exhibiting a movie involves the production and sale of a good for Texas Franchise Tax purposes, the AMC ruling does pave the way for taxpayers, such as other movie theaters, to include in COGS the costs that are allowed in the statute. Costs of producing a good can include certain depreciation, utilities, and taxes, in addition to the costs of acquiring the movie itself,” Stein said.
The Attorney General’s Office said it is reviewing the ruling and evaluating its options.