IN THE SUPREME COURT OF TEXAS ══════════ No. 18-0566 ══════════
LOCKHEED MARTIN CORPORATION, PETITIONER, v.
GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS, AND KEN PAXTON, ATTORNEY GENERAL OF THE STATE OF TEXAS, RESPONDENTS ══════════════════════════════════════════ ON PETITION FOR REVIEW FROM THE COURT OF APPEALS FOR THE THIRD DISTRICT OF TEXAS ══════════════════════════════════════════
Argued January 30, 2020
JUSTICE LEHRMANN delivered the opinion of the Court, in which CHIEF JUSTICE HECHT, JUSTICE GREEN, JUSTICE GUZMAN, JUSTICE DEVINE, JUSTICE BLACKLOCK, JUSTICE BUSBY, and JUSTICE BLAND joined.
JUSTICE BOYD filed a dissenting opinion.
This case involves a franchise-tax dispute, but federal law regulating foreign military sales
plays a significant role in the resolution of that dispute. Lockheed Martin Corporation
manufactured F-16 fighter jets in Fort Worth destined for foreign-government buyers. As required
by federal law, the foreign buyers contracted with the U.S. government to purchase the jets, and
the U.S. government in turn contracted with Lockheed Martin. The overarching issue is whether
Lockheed Martin’s receipts from the sales of those jets were properly sourced to Texas for purposes of calculating its Texas franchise tax. The trial court and the court of appeals held that
they were. We disagree and reverse the court of appeals’ judgment.
I. Background
Because the transactions giving rise to this tax dispute were structured to comply with
federal arms-control laws, we begin with a discussion of that framework.
A. Regulation of Foreign Military Sales
To support U.S. foreign-policy and national-security objectives, the Arms Export Control
Act restricts sales of U.S.-manufactured military goods to foreign governments. See 22 U.S.C.
§§ 2751–2799aa-2. The level of restriction depends on the sensitivity of the “defense articles”
being purchased. See id. § 2778. Approved foreign governments may purchase certain less-
sensitive defense articles directly from private contractors with relatively minimal direct
government oversight via what are known as “Direct Commercial Sales” transactions. See id.;
U.S. DEP’T OF DEF., DEF. SEC. COOPERATION AGENCY, DoD 5105.38-M, SECURITY ASSISTANCE
MANAGEMENT MANUAL §§ C4.3.6 (2003) [hereinafter “2003 SAMM”]. 1 Defense articles of
greater military sensitivity, including the F-16 fighter jets that are the subject of this suit, are
subject to substantially more government oversight and control and may be purchased only through
the “Foreign Military Sales” (FMS) program, which is administered by the Department of Defense.
See 22 U.S.C. §§ 2761–62; see also 2003 SAMM §§ C4.1, C4.3. 2
FMS transactions begin with a “Letter of Request” from a foreign government identifying
the defense articles or services the government wishes to purchase. 2003 SAMM § C5.1.1. The
1 The parties stipulated to the applicability of both the 1988 version of the SAMM and the 2003 version. 2 Foreign governments may choose to utilize the FMS program with respect to articles that could otherwise be purchased through Direct Commercial Sales transactions. See 2003 SAMM §§ C4.5.8, C4.5.10.
2 foreign government and the U.S. government then enter into a formal “Letter of Offer and
Acceptance” (LOA) that itemizes the defense articles or services the foreign government intends
to procure and the terms and conditions of the sale. See id. §§ C4.1.1, C5.4.1. LOAs may be
“implemented” in one of two ways. First, under certain circumstances the Department of Defense
may fulfill the order from its existing stocks. 22 U.S.C. § 2761. Second, the U.S. government
may “enter into contracts for the procurement of defense articles” from private contractors. Id.
§ 2762; see also 2003 SAMM § C4.3.1 (explaining that the Department may enter into
procurement contracts “on behalf of eligible foreign countries”). The second “procurement”
pathway is at issue here.
Under that pathway, a signed LOA identifies the foreign buyer, sets out the precise design
specifications requested, and includes plans for delivery to the buyer. See 2003 SAMM fig.C5.F2.
The price of the items is set at “the total cost” to the U.S. government of procuring the items,
regardless of whether that cost exceeds the LOA’s estimate. 3 Id. fig.C5.F3; see 22 U.S.C. § 2762
(providing that in an FMS sale to a foreign government, the foreign government must provide the
U.S. government “with a dependable undertaking (1) to pay the full amount of such contract which
will assure the United States Government against any loss on the contract, and (2) to make funds
available in such amounts and at such times as may be required to meet the payments required by
the contract, and any damages and costs that may accrue from the cancellation of such contract”).
Once an LOA is finalized and the foreign buyer remits the initial payment or assurance of payment,
the U.S. government is responsible for procuring the items “under terms and conditions consistent
3 The standard LOA terms and conditions include a statement that the buyer “recognizes that the [U.S. government] will procure and furnish the items in this LOA on a non-profit basis for the benefit of the Purchaser.” 2003 SAMM fig.C5.F3.
3 with [Department] regulations and procedures.” 2003 SAMM figs.C5.F2–.F3. The U.S.
government then contracts with a private contractor to produce the items specified in the LOA.4
BAE Sys. Tech. Solution & Servs., Inc. v. Republic of Korea’s Def. Acquisition Program Admin.,
884 F.3d 463, 467 (4th Cir. 2018). The LOA allows the United States to terminate or take other
action with respect to those contracts without affecting the LOA. 5
The U.S. Court of Appeals for the Fourth Circuit describes the FMS program as
“requir[ing] the intermediation of the United States and a back-to-back contract structure.”
Secretary of State for Def. v. Trimble Navigation Ltd., 484 F.3d 700, 707 (4th Cir. 2007). The
structure “reflects the national security interests of the United States” and forecloses implying a
direct contractual relationship between the domestic contractor and the foreign purchaser. See id.;
see also BAE Sys. Tech., 884 F.3d at 467 (“The U.S. government ‘determines the contract type,
selects the contract source, and negotiates prices and contract terms with individual contractors.’”
(quoting DEF. INST. OF SEC. COOPERATION STUDIES, THE MANAGEMENT OF SECURITY
COOPERATION (GREEN BOOK) 15-8 (37.1 ed. 2017))). 6 Thus, a procurement purchaser claiming
defective items, rather than complaining directly to the contractor, is directed to submit a “supply
discrepancy report” to the U.S. government, which “may be able to resolve the problem by seeking
4 The foreign buyer may coordinate and negotiate with a specific U.S. contractor in advance of the LOA and may urge the U.S. government to enter a sole-source contract with the designated contractor. BAE Sys. Tech., 884 F.3d at 468. The U.S. government may, but is not required to, agree to do so. Id. 5 The U.S. government has the power to halt export deliveries of military equipment to foreign purchasers in Direct Commercial Sales as well as FMS transactions. See DEF. INST. OF SEC. COOPERATION STUDIES, THE MANAGEMENT OF SECURITY COOPERATION (GREEN BOOK) 15-6 (39.0 ed. 2019). 6 The Green Book is published by “the agency responsible for providing research support to advance U.S. foreign policy through security assistance.” Trimble Navigation, 484 F.3d at 704 n.2. It does not set official policy but “is an attempt to summarize security assistance programs and is based on the [Arms Export Control Act] and the SAMM, among other sources.” Id.
4 resolution through the contractor under the provisions of the . . . procurement contract.” Trimble
Navigation, 484 F.3d at 704 (quoting 37.1 GREEN BOOK 8-11).
B. The FMS Transactions at Issue
The facts of this case are largely stipulated. Lockheed Martin Corporation is a global
security and aerospace company engaged in the research, design, development, manufacture,
integration, and sustainment of advanced technological systems, products, and services. Lockheed
Martin operates a manufacturing facility in Fort Worth, where it produces military aircraft for both
the U.S. government and certain approved foreign governments. During the franchise-tax report
years 2005 to 2007, Lockheed Martin delivered a number of F-16 fighter jets that it had developed
and produced at that facility for the governments of Chile, Greece, Israel, Oman, and Poland. As
required by the Arms Export Control Act, the sales of the F-16s were handled through the FMS
program described above. Thus, each sale was effected through two contracts: one between
Lockheed Martin and the U.S. government, and one (the LOA) between the U.S. government and
the foreign buyer.
The contracts between Lockheed Martin and the U.S. government identified the respective
foreign buyers and called for the jets to be designed to the buyers’ specifications, including
integrating certain equipment furnished by the foreign buyers. A Ferry Plan associated with each
transaction “define[d] events, tasks, and personnel associated with the delivery of [the] aircraft
from Lockheed Martin . . . to [the foreign buyer].” Transfer of legal title to each of the F-16s
occurred at Lockheed Martin’s Fort Worth facility upon the execution of a Material Inspection and
Receiving Report (DD250) by an authorized U.S. government representative. The executed
DD250 signified the U.S. government’s “final acceptance of the aircraft . . . as meeting the
5 applicable contractual requirements.” Lockheed Martin was then authorized to request payment,
which was made by the U.S. government “out of funds the foreign buyer ha[d] on deposit . . . or
based upon a ‘dependable undertaking’ by that foreign government.”
In the next step of the transaction, the U.S. government representative signed a Requisition
and Invoice/Shipping Document (DD Form 1149) documenting transfer of possession and control
of the aircraft to the U.S. government. 7 Another form, the Aerospace Vehicle Delivery Receipt
(AFTO 290), documented the transfer of possession and control of the aircraft to a U.S.
government pilot responsible for transporting it to the purchasing foreign government. A
representative of that government countersigned the AFTO 290 upon final delivery of the aircraft.
Pursuant to the Ferry Plan, Lockheed Martin retained certain obligations throughout the delivery
process, such as providing “technical assistance” at intermediate locations and additional “on-site
assistance and liaison support” at such locations as “necessary to allow uninterrupted delivery.”
C. Procedural History
The current dispute began when Lockheed Martin filed a claim with the Comptroller for a
refund of the portion of its franchise taxes for the tax years 2005 through 2007 attributable to the
sales of the F-16 aircraft described above. Lockheed Martin claimed that the receipts from its sales
of those aircraft did not qualify as “Texas gross receipts” for purposes of apportioning taxable
earned surplus and requested a refund of $2,671,154.83, plus interest. The Comptroller denied the
claim. After exhausting its administrative remedies, Lockheed Martin brought this suit.
7 The trial court found that upon such transfer of legal title, possession, and control, the U.S. government assumed all risk of loss for the F-16s at issue. The parties also stipulated that the foreign purchaser typically agrees in an LOA (1) to assume all risk of loss or damage to the aircraft and (2) to indemnify the U.S. government for any loss or damage to the aircraft for which the U.S. government is contractually responsible.
6 The trial court held a bench trial and rendered judgment for the Comptroller. The trial
court found that the sales of the F-16s at issue were completed within Texas and that the receipts
from those sales are Texas receipts; thus, the court concluded that Lockheed Martin was not
entitled to a refund. The court of appeals affirmed. 550 S.W.3d 855, 857 (Tex. App.—Austin
2018). We granted Lockheed Martin’s petition for review.
II. Analysis
A. Standard of Review
A tax-refund claimant who exhausts administrative remedies may sue the Comptroller and
obtain de novo judicial review of the claim. See TEX. TAX CODE §§ 112.151, .154. On such de
novo review, the burden of proof is on the claimant to prove entitlement to a refund. See Key W.
Life Ins. Co. v. State Bd. of Ins., 350 S.W.2d 839, 846 (Tex. 1961) (“Review by trial de novo has
all the attributes of an original action in the reviewing court.”). Accordingly, to warrant appellate
reversal of a trial court’s judgment in favor of the Comptroller, the evidence must conclusively
establish the material facts entitling the claimant to the refund it seeks. See Dow Chem. Co. v.
Francis, 46 S.W.3d 237, 241 (Tex. 2001) (“When a party attacks the legal sufficiency of an adverse
finding on an issue on which she has the burden of proof, she must demonstrate on appeal that the
evidence establishes, as a matter of law, all vital facts in support of the issue.”). Here, Lockheed
Martin must demonstrate that the evidence conclusively establishes that the receipts from the sales
of the F-16s at issue are not properly sourced to Texas.
That said, as the court of appeals and the parties recognize, the material facts are essentially
undisputed, and the outcome of the case hinges on the proper interpretation of former section
7 171.1032 of the Texas Tax Code. Statutory interpretation is, of course, an issue of law that we
review de novo. Sw. Royalties, Inc. v. Hegar, 500 S.W.3d 400, 404 (Tex. 2016).
B. Franchise Tax
We have described the Texas franchise tax as a tax on the privilege of doing business in
Texas. In re Nestle USA, Inc., 387 S.W.3d 610, 621–22 (Tex. 2012). For the tax years at issue,
an entity was required to pay Texas franchise tax on its “earned surplus” apportioned to Texas.
See Former TEX. TAX CODE §§ 171.002, 8 .106(b); 9 see also TGS-NOPEC Geophysical Co. v.
Combs, 340 S.W.3d 432, 437 (Tex. 2011) (explaining that “[b]efore 2008, the franchise tax was
imposed on an entity’s capital or earned surplus,” while the Tax Code “presently imposes franchise
tax on an entity’s ‘taxable margin’”). That portion was determined by “multiplying the taxable
earned surplus by a fraction, the numerator of which is the corporation’s gross receipts from
business done in this state, as determined under [former] Section 171.1032, and the denominator
of which is the corporation’s gross receipts from its entire business.” Former TEX. TAX CODE
§ 101.106(b). 10 In turn, former section 171.1032 described the receipts that must be added for
inclusion in the numerator of the apportionment fraction. Id. § 171.1032. 11 As relevant here,
8 See Act of June 1, 1981, 67th Leg., R.S., ch. 389, § 1, 1981 Tex. Gen. Laws 1490, 1691 (as amended in 1984, 1987, 1991, 1997, 1999) (codified at TEX. TAX CODE § 171.002). Citations to former sections 171.002, 171.1032, and 171.106 of the Tax Code are to the versions in effect during the pertinent tax years. See Act of June 1, 1981, 67th Leg., R.S., ch. 389, § 1, 1981 Tex. Gen. Laws 1490, 1698 (as amended in 9
1991, 1997, 1999, 2001, 2003) (codified at TEX. TAX CODE § 171.106). 10 The current version of section 101.106 similarly instructs that apportioning “margin” to Texas is done by “multiplying the margin by a fraction, the numerator of which is the taxable entity's gross receipts from business done in this state, as determined under Section 171.103, and the denominator of which is the taxable entity's gross receipts from its entire business.” TEX. TAX CODE § 101.106. 11 See Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5, § 8.06, 1981 Tex. Gen. Laws 156–57 (as amended in 1993, 1997, 2001, 2003) (codified at TEX. TAX CODE § 171.1032), repealed by Act of May 15, 2006, 79th Leg., 3d C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 8, 19 (recodified at TEX. TAX CODE § 171.103).
8 “gross receipts of a corporation from its business done in this state” include “each sale of tangible
personal property if the property is delivered or shipped to a buyer in this state regardless of the
FOB point[12] or another condition of the sale.” Id. § 171.1032(a)(1). 13
1. Identity of the Buyer
The parties’ dispute has largely focused on the identity of the relevant “buyer” for purposes
of former section 171.1032. Lockheed Martin asserts that, in a cohesive FMS transaction
involving the manufacture and sale of military goods to a foreign government, that foreign
government is the “buyer,” and the sale therefore does not generate Texas receipts. The
Comptroller responds that FMS transactions involving procurement consist of two distinct sales:
the contractor’s sale of the military goods to the U.S. government, and the U.S. government’s
resale of those goods to the foreign purchaser. Thus, the Comptroller contends that the U.S.
government was the “buyer” and that Lockheed Martin’s sales of the aircraft to the U.S.
government were completed within Texas, thereby generating Texas receipts. The parties further
dispute whether former section 171.1032(a)’s applicability to sales in which “the property is
delivered or shipped to a buyer in this state” denotes a “location of delivery” test or a “location of
buyer” test; that is, does apportionment hinge on whether delivery occurred in Texas or whether
the buyer was in Texas?
12 Under the Uniform Commercial Code, the “FOB [or ‘free on board’] point” is the designated location to which the seller bears the expense and risk of transporting the goods. See TEX. BUS. & COM. CODE § 2.319. For example, “when the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided in this chapter . . . and bear the expense and risk of putting them into the possession of the carrier.” Id. § 2.319(a)(1). 13 The current version of the Tax Code similarly takes into account, in apportioning an entity’s taxable margin based on gross receipts from business done in this state, the entity’s receipts 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.” TEX. TAX CODE § 171.103(a)(1).
9 The court of appeals agreed with the Comptroller that the U.S. government is the relevant
buyer, that Lockheed Martin’s sales to the U.S. government were completed within Texas, and
that the receipts from those sales were thus properly sourced to Texas. 550 S.W.3d at 868–71.
Noting the absence of privity of contract between Lockheed Martin and the foreign countries, the
court concluded that Lockheed Martin “inescapably ‘sold’ or made ‘sales’ of the aircraft in
question to the U.S. government” and that “any subsequent or related transactions between the
U.S. government and the foreign governments” do not alter the fact that those sales “begin and
end in Texas.” Id. at 868–69 (internal quotations omitted).
Both the court of appeals and the parties rely to some extent on the Third Court of Appeals’
decision in Bullock v. Enserch Exploration, Inc., 614 S.W.2d 215 (Tex. App.—Austin 1981, writ
ref’d n.r.e.). In that case, taxable entities sold natural gas to interstate transmission companies in
Texas and delivered the gas to those companies in Texas. Id. at 216. The transmission companies
transported the gas out of state and resold it to out-of-state purchasers. Id. at 216–17. The court
held that the taxable entities were “not sellers of natural gas to out-of-state buyers” and that the
entities’ transactions with the transmission companies began and ended in Texas. Id.
The court of appeals in this case held that under Enserch, the U.S. government’s resales of
the F-16s at issue to foreign governments did not “convert the identity of Lockheed Martin’s
‘buyer’” to those foreign governments. 550 S.W.3d at 869. The court further cited the federal
case law discussed above regarding the absence of contractual privity between Lockheed Martin
and the foreign governments, concluding that while the U.S. government “to some extent does act
‘on behalf of’ a foreign government or akin to a hired purchaser when conducting FMS
procurements,” the governing framework for those procurements serves the U.S. government’s
10 national-security and policy interests and gives the government “ultimate power and control over
the transactions relative to the foreign nations’ respective interests.” Id. at 869–70. The
Comptroller defends the court of appeals’ analysis as properly reflecting the structure of the FMS
program, which purposefully interposes the U.S. government between contractors and foreign
customers in a “mandatory sale-for-resale transaction.”
Lockheed Martin disputes the characterization of an FMS procurement as a typical “sale
for resale” akin to the transaction at issue in Enserch. Lockheed Martin notes that (1) the defense
articles being purchased never enter the U.S. government’s inventory, (2) FMS buyers specify up
front what they wish to buy and remit payment or assurance of payment before the Defense
Department approaches a contractor to manufacture the items, and (3) the U.S. government is
statutorily forbidden from bearing any profit or loss from an FMS procurement sale. Lockheed
Martin further emphasizes the fact that the foreign buyer supplies design specifications and
directives to procure components from certain vendors, sometimes even requiring incorporation
of buyer-supplied equipment. Noting that “[w]ithout a foreign buyer, there is no Foreign Military
Sale,” Lockheed Martin characterizes an FMS procurement sale as a single transaction, “initiated
by a foreign-government buyer and effectuated by two interrelated, interdependent contracts, with
the United States overseeing the transaction, not as mere reseller, but as sovereign.” For the
reasons discussed below, we agree with Lockheed Martin’s characterization of the transaction.
As an initial matter, we take no issue with Enserch’s general holding that a sale of goods
to a Texas purchaser is not transformed into a sale to an out-of-state buyer merely because the
Texas purchaser resells the goods to that out-of-state buyer. See 614 S.W.2d at 217. However, in
the unique circumstances presented by the FMS transactions at issue, Lockheed Martin is correct
11 that the pertinent “buyers” for Texas franchise-tax purposes are the foreign governments for whom
the aircraft were manufactured and to whom they were ultimately delivered. Again, in
apportioning business done in Texas, a corporation’s Texas receipts include “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.” Former TEX. TAX CODE § 171.1032(a)(1). Lockheed
Martin argues that, for defense articles governed by FMS procurement obligations, the requirement
that the U.S. take intermediate title to the goods is a “condition of the sale” to the foreign
government that is disregarded for franchise-tax purposes. We agree.
A “condition” is “something that exists as an occasion of something else: a circumstance
that is essential to the appearance or occurrence of something else.” Condition, WEBSTER’S THIRD
NEW INTERNATIONAL DICTIONARY (2002). When a foreign government wishes to purchase certain
particularly sensitive military goods manufactured by U.S. contractors, federal law mandates that
the sales be effected by two contracts, as the trial court found happened in this case. In this way,
the U.S. government essentially acts as a required intermediary, allowing it to retain maximum
oversight over the transaction in service of national-security interests. See Trimble Navigation,
484 F.3d at 707; see also 550 S.W.3d at 869–70 (recognizing that, at least to some extent, the U.S.
government acts on behalf of a foreign purchaser when conducting an FMS procurement but
retains ultimate control over the transaction). Thus, the U.S. government’s involvement is
“essential” to the sale of goods that may be purchased only through the FMS program, including
the F-16s at issue. Because the sale of the F-16s could not occur without that involvement, the
federal mandate is a statutory “condition of the sale” that we disregard for franchise-tax purposes.
12 Moreover, an FMS procurement transaction does not fit the “sale for resale” paradigm on
which the court of appeals relied in Enserch. The Comptroller does not dispute that the F-16s at
issue were “custom built” and “uniquely designed” to the foreign buyers’ specifications. Lockheed
Martin was paid “out of funds the foreign buyer ha[d] on deposit with the [U.S. government] as
part of the FMS program or based upon a ‘dependable undertaking’ by that foreign government
based on which the [U.S. government] ha[d] extended to it credit for the funds.” The price of the
items tracked the cost to the U.S. government, which neither profits from nor takes a loss on an
FMS procurement transaction. 14 See 22 U.S.C. § 2762. For franchise-tax purposes, the U.S.
government’s role was as a statutorily mandated intermediary, albeit an intermediary with ultimate
authority over the transaction.
Our holding is also consistent with Texas’s use of a single-factor franchise-tax
apportionment method premised on sales. Gen. Dynamics Corp. v. Sharp, 919 S.W.2d 861, 864
(Tex. App.—Austin 1996, writ denied) (citing TEX. TAX CODE § 171.106). Generally, a sales-
factor apportionment formula is intended “to reflect the contribution of the market state to the
taxpayer’s income.” JEROME R. HELLERSTEIN ET AL., STATE TAXATION ¶ 9.18[3][a] (3d ed. 2019).
Unlike a typical sale-for-resale middleman that serves as an intermediate market for goods, the
U.S. government was never the “market” for the F-16s at issue. Rather, the “market” all along
was the purchasing foreign governments. 15
The Comptroller points out that the U.S. government benefits from FMS transactions in ways other than 14
monetary profit, such as facilitating U.S. military objectives and global relationships and achieving cost-reducing economies of scale in securing defense equipment for U.S. allies. While that may be true, it does not make the U.S. government the market for the defense articles it procures at the behest of those allies. 15 The dissent summarily discounts the distinctions between the FMS transactions at issue and typical sale- for-resale transactions as irrelevant to whether the U.S. government was “a buyer” under the Tax Code. Post at ___. To the contrary, the fact that the U.S. government incurs no profit or loss on the transaction and pays only from funds
13 The court of appeals cited several cases for the proposition that “federal courts have
rejected, in a variety of contexts, similar invitations to disregard or ‘pierce’ the two-contract
structure of FMS transactions.” 550 S.W.3d at 869. For example, in Trimble Navigation, the
Fourth Circuit held that a foreign government in an FMS transaction cannot sue the U.S. contractor
directly as a third-party beneficiary of the procurement contract. 484 F.3d at 707. And in United
States ex rel. Campbell v. Lockheed Martin Corp., the district court rejected Lockheed Martin’s
argument that the False Claims Act did not apply to its alleged fraudulent claims for payment from
the U.S. government in an FMS transaction, holding that the fact that the claims were paid out of
funds deposited by the foreign government was irrelevant because the United States had a
contractual obligation to pay and used funds in the U.S. Treasury to do so. 282 F. Supp. 2d 1324,
1338, 1340–41 (M.D. Fla. 2003).
Lockheed Martin argues that “whether a relationship exists between parties sufficient to
assign contractual or tort duties and liabilities is irrelevant to identifying a buyer for Texas
franchise-tax purposes.” Again, we agree. Our holding is premised on a state statute governing
payment of state taxes. Recognizing the foreign government as the pertinent “buyer” for purposes
of sourcing receipts from FMS transactions for state franchise-tax purposes comports with the
plain language of the Tax Code and, importantly, does not affect the FMS program or the important
national-security purposes it serves. Cf. Trimble, 484 F.3d at 702 (noting that affording an FMS
purchaser third-party beneficiary status “is contrary to the structure and intent of the Foreign
Military Sales program”).
deposited by the foreign buyer (or based on a dependable undertaking by that buyer) only serves to highlight that the U.S. government’s role is a “condition of the sale” of defense articles to a foreign government.
14 In sum, we hold that Lockheed Martin’s “sale” of each F-16 at issue was to the respective
foreign-government “buyer” for whom the aircraft was manufactured and to whom it was
ultimately delivered. The U.S. government’s involvement in each transaction was a “condition of
the sale” that has no bearing on whether to apportion the receipts from that sale to Texas. 16
2. Were the F-16s at issue “delivered or shipped to a buyer in this state”?
The Comptroller argues that even if the foreign governments are the relevant buyers of the
F-16s at issue, the aircraft were “delivered” in Texas and thus the receipts from the sales of those
aircraft are properly sourced to Texas. See Former TEX. TAX CODE § 171.1032(a)(1) (Texas
receipts include “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”). The Comptroller
argues that “in this state” modifies “delivered or shipped” such that the place of delivery controls
for apportionment purposes even if the buyer is located out of state. Here, the Comptroller
contends, the place of delivery was Lockheed Martin’s Fort Worth manufacturing facility, where
title to the F-16s was transferred to the U.S. government. Lockheed Martin takes the position that
“in this state” modifies “buyer,” meaning that the product’s ultimate destination—the buyer’s
location—determines sourcing.
We need not resolve this dispute. Because the foreign governments are the buyers for
franchise-tax purposes, even under the Comptroller’s interpretation the sales are properly sourced
to Texas only if the aircraft were delivered to the foreign governments in Texas. The record belies
that conclusion. As the parties stipulated, after title and possession shifted to the U.S. government
16 The Comptroller notes that Lockheed Martin does not argue that its receipts are taxable to the foreign government and that concerns of double taxation are not raised here. We agree, but we fail to see how that point is relevant to the analysis.
15 in Fort Worth, 17 a U.S. government pilot took responsibility for “ferrying the aircraft to the
purchasing foreign government.” Upon the aircraft’s arrival in the foreign country, the “receiving”
foreign government countersigned the AFTO 290 form to document “receipt, delivery, and transfer
of possession of the aircraft from the [U.S. government] to the foreign government.”
Those stipulations confirm that the F-16s at issue were delivered to the “buyers” outside
of Texas. Accordingly, the receipts from the sales of those aircraft are not properly sourced to
Texas under either party’s interpretation of the apportionment statute.
III. Conclusion
Both the trial court and the court of appeals erred in holding that Lockheed Martin’s
receipts from the sales of the F-16s at issue qualify as “gross receipts from business done in this
state.” We hold that Lockheed Martin conclusively demonstrated its entitlement to a refund of
franchise taxes for the pertinent tax period. We reverse the court of appeals’ judgment and remand
the case to the trial court for further proceedings consistent with this opinion.
________________________________ Debra H. Lehrmann Justice
OPINION DELIVERED: May 1, 2020
17 As noted, the “FOB point” is irrelevant to the sourcing determination. Former TEX. TAX CODE § 171.1032.