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Key takeaways
- Statutory Sourcing Rule at Stake. During oral argument before the Texas Supreme Court this week, the Justices closely examined whether Texas franchise tax receipts from sales of tangible personal property should be sourced based on the location where the buyer takes delivery (Comptroller’s position/rule) or the buyer’s ultimate destination or market (NuStar’s position). The questions and exchanges highlighted the significance of clarifying the meaning of Tax Code § 171.103(a)(1), with the Court’s eventual decision poised to potentially reshape sourcing for multistate sellers.
- Significant Financial and Compliance Implications. A decision for NuStar could open refund opportunities for taxpayers who transferred goods in Texas but whose buyers shipped them out of state, while a decision for the Comptroller would reinforce the current place of delivery approach and may prompt legislative review. Companies with Texas nexus should assess their sales structures, apportionment methodologies, and consider protective refund claims for open periods.
- Impact on Drop Shipments and Contracting. The Court’s ruling could affect the sourcing of receipts from drop shipment transactions and may require businesses to revisit contract terms, including FOB points and title passage language, to align with the prevailing sourcing methodology.
- Broader Multistate and Legislative Effects. Texas’s approach could influence legislative and regulatory debates in other states, especially those with significant logistics and port activity.
- Next Steps for Taxpayers. Taxpayers should monitor the decision, review their sales and delivery structures, and be prepared for possible changes in compliance and financial reporting requirements.
Background
Texas imposes its franchise tax on a taxpayer’s apportioned margin. Under Tax Code § 171.103(a)(1), gross receipts are Texas receipts when derived from “each sale of tangible personal property if the property is delivered or shipped to a buyer in this state regardless of the FOB point or another condition of the sale.”
Comptroller Rule 3.591(e)(29) interprets that language to source receipts to Texas if possession or control is transferred in Texas—even if the buyer immediately ships the goods elsewhere.
Oral Argument Highlights
On Wednesday, September 10th, the Texas Supreme Court heard oral argument in NuStar Energy L.P. v. Hancock (No. 24-0037), a pivotal case challenging the Comptroller’s “place of delivery” rule for sourcing receipts from sales of tangible personal property under the Texas franchise tax. For decades, the Comptroller has sourced sales to Texas when the buyer takes possession in Texas, regardless of where the goods are ultimately consumed. NuStar argues that the statute, Tax Code § 171.103(a)(1), instead requires an “ultimate destination” or “market based” approach, focusing on the buyer’s location rather than the point of delivery.
NuStar sold high-sulfur bunker fuel to oceangoing vessels at Texas ports. However, because environmental rules prohibited use of the fuel within 200 nautical miles of the coast, the product was not consumed until well outside Texas waters. NuStar sought a refund, contending that its customers were not in Texas. The trial court granted summary judgment in favor of the Comptroller and the appellate court affirmed, concluding that the Comptroller's rule is consistent with Tax Code § 171.103(a)(1) and is, therefore, valid.
The Supreme Court Justices’ questions centered on the statutory text and the implications of changing a long-standing administrative practice. While some Justices expressed skepticism about reading “destination” or “market” into the statute, others probed the practical and financial consequences of any possible shift in sourcing methodology.
1. Opening Positions
- NuStar. Framing the case as pure textualism, NuStar’s counsel argued that the only way to give independent meaning to the clause “to a buyer” is to read “in this state” as modifying “buyer.” Otherwise, the words become surplusage and the statute would simply refer to delivery in Texas.
- Comptroller. The Comptroller’s counsel countered that the statutory grammar is plain and that Texas caselaw—particularly Bullock v. Enserch Exploration, Inc.1 )—has long treated the place of physical delivery as dispositive.
2. Chief Justice Blacklock’s Textual Focus
Chief Justice Blacklock pressed NuStar repeatedly: “Where do we find ‘destination’ or ‘ultimate’ in this text?” Chief Justice Blacklock suggested that importing those concepts would violate the Court’s admonition against judicial rewriting.
3. Justice Busby on Temporary Presence
Justice Busby queried whether the statute contains an exception for goods only “temporarily” in Texas, noting that the fuel was “received in Texas” even if not used here. NuStar’s counsel responded that the statute differentiates between “delivery” and the buyer’s location, but Justice Busby noted that the Legislature “gets very detailed” elsewhere in the apportionment statute and did not add such a qualifier here.
4. Justice Bland on Historical Practice
Justice Bland asked the Comptroller’s counsel how long the rule had gone unchallenged. The Comptroller’s counsel replied that the “place of transfer” approach has been in force since 1969 and that upending it would disrupt settled expectations for taxpayers and the state treasury alike.
5. Justice Lehrmann’s Absence
Justice Lehrmann did not participate, leaving eight Justices. A 4-4 split would affirm the Court of Appeals, but there is no clear indication the Court is fractured along predictable lines.
Practical Implications
- Refund Opportunities—and Risks. A NuStar win could open the door to refund claims for open years where goods were transferred in Texas but shipped for out-of-state consumption. Conversely, taxpayers that have relied on the Comptroller’s rule may consider protective claims if limitations periods are approaching. Taxpayers should also be aware that a change in the sourcing rule could trigger audits or adjustments for prior periods, potentially resulting in both refund opportunities and additional assessments depending on their historical reporting positions.
- Drop Shipment Implications. The Court’s decision could have significant consequences for drop shipment transactions, where goods are shipped directly from a seller to a purchaser’s customer in Texas at the purchaser’s request. Under current Comptroller rules, such drop shipments result in Texas gross receipts for both the seller and the purchaser. If the Court adopts a market based or ultimate destination approach, the sourcing of receipts from drop shipments could change, potentially affecting both refund opportunities and compliance obligations for businesses engaged in these transactions. Taxpayers involved in drop shipments should carefully review their sales structures and consider the potential impact of a shift in sourcing methodology. A change in the rule could also require businesses to update their internal tracking systems and documentation processes to accurately determine the ultimate destination of goods in drop shipment scenarios.
- Contract Drafting and Delivery Location. For Texas franchise tax purposes, the sourcing of receipts from sales of tangible personal property is determined by the physical location where delivery or shipment to the buyer occurs—not by contract terms such as FOB point or title passage. Both the current Comptroller’s rule and NuStar’s position treat FOB and title passage language as largely irrelevant for sourcing; the critical factor is where the buyer actually receives possession or control of the goods. Businesses should review their operational practices and consult legal counsel to ensure that the actual delivery location aligns with the prevailing sourcing methodology, as this will determine Texas franchise tax exposure—not the contractual allocation of risk or title.
- Multistate Conformity and Policy Influence. The Texas Supreme Court’s interpretation of Tax Code § 171.103(a)(1) is likely to have significant influence on legislative and regulatory developments in other states, particularly those with major ports and logistics operations. Companies with multistate operations should closely monitor Texas developments, as changes in Texas policy could prompt similar adjustments in other jurisdictions’ sourcing rules for tangible personal property.
- Financial Statement Impact. Companies with significant Texas nexus should model alternative apportionment scenarios to assess potential changes in effective tax rates and reserves. Early analysis and scenario planning can help businesses anticipate the financial statement impact and communicate potential risks or opportunities to stakeholders and auditors.
Next Steps
Briefing is complete and no supplemental submissions were requested. The Texas Supreme Court typically issues opinions within six to nine months of argument, though an earlier ruling is possible. In the interim, taxpayers should:
- Inventory sales structures involving Texas delivery points;
- Evaluate nexus assumptions and apportionment methodologies;
- Consider filing protective refund claims for open periods; and
- Monitor legislative or administrative guidance that may follow the Texas Supreme Court’s decision.
We will continue to track developments and are available to discuss how the Texas Supreme Court’s forthcoming opinion may affect your Texas franchise tax profile.
- 614 S.W.2d 215 (Tex. Civ. App.—Austin 1981, writ ref’d n.r.e.).
Client Alert 2025-234
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