Consistent with a prior decision of a sister appellate court, Texas’ Texarkana Court of Appeals held that the sale of telecommunication products and signals constitutes the sale of a service for purposes of Texas’ franchise tax. The taxpayer sold electrical, light and radio signals to customers through copper wire, fiber-optic cable and leased telephone lines. At trial and on appeal, the taxpayer argued it sold tangible personal property because the signals were perceptible to the senses and, because it sold tangible personal property, it was entitled to a deduction for costs of goods sold from its taxable margin. The taxpayer also argued that although it sold signals, it did not provide a telecommunications service because it did not have the infrastructure to deliver, transmit, or convey the signals. Like the trial court before it, the Court of Appeals found these arguments unpersuasive, concluding first that leasing “the means by which it made its signals available to customers did not transform its business” to anything other than transmitting, conveying, or routing its signals to customers. The court also held it was “bound by the precedent” of a sister court, NTS Commc’ns, Inc. v. Hegar,1 which “already decided that provision of telecommunications products constitutes the provision of services, not goods.” Consequently, the taxpayer was not entitled to a costs of goods sold deduction.
