SALT Blog 

The Texas Franchise Tax has often been the subject of litigation because of its hybrid structure—formally imposed on taxable margin rather than gross receipts but calculated using revenue-based inputs and apportionment rules.  This structure has repeatedly exposed the tax to challenges arguing that despite legislative labeling to the contrary, in substance, it operates as a gross receipts tax.  Against that backdrop, the Fifteenth Court of Appeals’ decision in American Airlines, Inc. v. Hancock represents a departure from the assumption that the tax’s structure alone immunizes it from external legal limits.

The dispute in American Airlines arose from the federal Anti‑Head Tax Act (“AHTA”), which prohibits states from imposing taxes “on or measured by” gross receipts derived from air commerce or air transportation.  American Airlines argued that the Texas franchise tax, as applied to its passenger ticket sales, baggage fees, and freight revenues, functioned impermissibly as a tax on gross receipts.  The Comptroller countered that the franchise tax is a composite tax imposed on the taxable margin of an entity’s entire business, and therefore cannot be analyzed by isolating particular (i.e. air transportation) revenue streams. 

The Fifteenth Court of Appeals sided with American, emphasizing the “as‑applied” nature of the preemption analysis.  The court concluded that, notwithstanding the franchise tax’s general design, American’s transportation services revenues passed through the franchise tax calculation without any meaningful deductions or exclusions and were ultimately taxed at a fixed percentage after apportionment—effectively, that the franchise tax measured, and imposed a levy on, a defined percentage of American’s gross receipts from air transportation in violation of the AHTA.

In confirming the Texas franchise tax is not immune from federal preemption simply because it is framed as a margin‑based tax, American Airlines may have significant implications for both taxpayers and the State of Texas.  If the state wishes to preserve the franchise tax base, it may face pressure to reassess how exclusions, deductions, or alternative calculations apply to other revenue streams with similar federal preemption statutes.  Until then, however, American Airlines suggests that taxpayers who can identify federal statutes preempting taxation based on gross receipts for certain revenues, may enjoy favorable treatment when challenging the franchise tax determinations in the Texas court system.