According to global tax services firm Ryan, in Hegar v. Sunstate Equipment, the Texas Third Court of Appeals found that the franchise tax deduction for cost of goods sold (COGS) does not include costs associated with the transportation of rental equipment to lessees.

Heavy construction equipment rental companies are allowed to claim a COGS deduction for the expenses related to equipment rental and leasing.

Sunstate rented equipment to subcontractors and provided transportation of the equipment to and from its customers’ job sites. Because its equipment transportation services were integral to its business operations, Sunstate included its transportation-related expenses in its franchise tax COGS deduction.

In finding in favor of the state, the court explained that, for franchise tax purposes, COGS includes expenses related to producing, obtaining, manufacturing or storing goods. Expenses related to selling, distributing and transporting goods to customers are not includable in COGS. Because the costs of delivering and picking up rental equipment from job sites are not amounts related to the acquisition or production of rental equipment, such costs cannot be included in Sunstate’s COGS calculation.