Texas Court of Appeals' Ruling Disallows Cost of Labor Deductions for Auto Dealers

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In Autohaus LP, LLP v. Combs1,  a 2014 case involving the dealership and the Texas comptroller, a Travis County District Court judge ruled that the cost of goods sold deduction for Texas franchise purposes applied to all labor costs associated with the auto dealer's installation of parts in vehicles. The Texas comptroller's office contended that only costs included in the manufacturing or construction process are to be included. However, the judge ultimately ruled in favor of Autohaus, meaning the group was able to deduct all cost of labor for the Texas margin tax.

As a result of this decision, many Texas dealerships filed amended tax returns that were still open under the statute of limitations - many of which were deducting the cost of labor and requesting subsequent refunds. The claims were denied and official protests were directed towards the Texas comptroller to keep the claims open until the Autohaus case was resolved.

As expected, the Texas comptroller appealed the initial ruling in 2015. On February 24, 2017, the Court of Appeals ruled in favor of the comptroller in Hegar v. Autohaus,  which means that cost of labor is not allowed for installation of parts on customer-owner vehicles.

What Now?

Autohaus has until Monday, March 13, 2017 to file a motion for rehearing. Should Autohaus seek to file a petition for review with the Texas Supreme Court, they have 45 days to do so after the Court rules on the Motion for Rehearing. If no Motion for Rehearing is filed, the deadline to file the petition would be 45 day after the Court of Appeals ruling, which falls on April 10, 2017. 

Nonetheless, while the future of this case is not definitive at this point, Texas dealers should be aware of the significance of the latest ruling and consider the impacts of the decision.

To read the official court opinion from the Texas Court of Appeals, click here.


For more information contact your tax advisor or one of our DHG team members listed below:

Dallas, TX

Memphis, TN

1 Autohaus LP, LLP v. Susan Combs, Comptroller of Public Accounts of the State of Texas and Greg Abbott, Attorney General of the State of Texas, District Court of Travis County Texas, Cause No. D-1-GN-13-000989, July 22, 2014.

2 Hegar v. Autohaus, Court of Appeals of Texas, Third District, Austin, No. 03-15-00427-CV, February 24, 2017