Key takeaways
- Travis County District Court concluded that the Texas franchise tax, as applied to American Airlines, Inc. ("American"), was preempted by the federal Anti-Head Tax Act (“AHTA”).1
- The court rejected the Comptroller's arguments that the Texas franchise tax was not a gross receipts tax and that it did not apply to gross receipts from air commerce or air transportation.
- The Texas franchise tax is susceptible to further federal preemption challenges.
Background
American is an airline carrier based in Fort Worth, Texas, that operates a fleet of approximately 1,000 aircraft and transports people and baggage to destinations in North America, the Caribbean, Latin America, Europe, and the Asia-Pacific Region. This lawsuit concerned American's Texas franchise tax for report year 2015, which covered fiscal year 2014.
The Texas franchise tax is based on the taxable margin of certain entities that do business in Texas. An entity’s taxable margin is equal to either 70% of the entity’s total revenue, or the entity’s total revenue less a deduction for one of the following: (i) $1 million; (ii) cost of goods sold; or (iii) compensation. The resulting taxable margin is then apportioned to Texas using a gross receipts factor. The franchise tax is then calculated by multiplying the apportioned taxable margin by the applicable franchise tax rate.
In calculating its taxable margin for report year 2015, American did not subtract revenues from passenger ticket sales, baggage fees, and freight transportation, because it opted to calculate its taxable margin by multiplying its total revenue by 70%.
American contended that its revenue from baggage fees, passenger fees, and freight transportation (“transportation revenue”) was not subject to the Texas franchise tax because the authority of Texas to tax the transportation revenue was preempted by the AHTA, which bars states from levying any tax on gross receipts from air commerce or air transportation. Transporting people, baggage, and freight by air constitutes air commerce and air transportation under the AHTA.
For report years 2009–2014, the Comptroller agreed with American's position and did not include American's transportation revenue in its franchise tax base. However, the Comptroller later changed course and sought an opinion from the United States Department of Transportation (the "DOT")—the federal agency responsible for administering the AHTA—that the AHTA did not preempt the Texas franchise tax as applied to revenues received from air commerce or transportation. The DOT disagreed with the Comptroller's position and affirmed that the AHTA preempted such a tax.