Do the costs of building and maintaining private logging roads count as cost of goods sold (COGS) for Texas franchise (margin) tax purposes?

Plain-English summary

A timberland company that harvests logs and manufactures wholesale lumber and windows asked whether the cost of building and maintaining its own logging roads counts toward the cost of goods sold (COGS) deduction on its Texas franchise tax report. The Comptroller said yes, on two independent grounds.

The company built permanent roads to reach its timberland generally, and temporary "spur" roads to reach specific harvest areas — both used exclusively by the company's own logging crews and trucks to extract timber and haul it to its lumber mill for processing (they're not public roads). The Comptroller found:

1. Inbound transportation costs. COGS includes costs of transporting goods from a vendor to the taxpayer, or between the taxpayer's own storage/processing facilities. Moving harvested timber from the extraction site to the company's own mill is analogous to moving goods between a taxpayer's own facilities, so the road construction/maintenance costs tied to that movement qualify as inbound transportation costs.
2. Depreciation. Separately, to the extent the company depreciated the logging-road costs on its federal income tax return, that depreciation is also includible in COGS because the roads are necessary for extracting and producing the lumber and windows the company sells.

What this means for you

Timber, mining, and other extraction-based manufacturers

If your business builds private roads or similar access infrastructure solely to move raw materials from an extraction site to your own processing facility, this ruling supports including those construction and maintenance costs in COGS — both as inbound transportation costs and (separately) as depreciation to the extent you depreciate the asset federally. The facts mattered here: the roads were privately built, used exclusively by the company, and directly tied to moving goods toward production.

Vertically integrated manufacturers generally

The ruling reinforces that COGS isn't limited to obvious production costs — infrastructure that enables moving raw materials between a company's own extraction and processing operations can qualify as "inbound transportation," and depreciated infrastructure necessary for production can independently qualify under the depreciation provision, even where the two grounds overlap on the same cost.

Accountants and tax professionals

Note the two-track analysis: Section 171.1012(c)(4) (inbound transportation) and Section 171.1012(c)(6) (depreciation) were applied as alternative, independently sufficient bases for the same cost — useful if a client's transportation-cost argument is uncertain but the asset is separately depreciated. The ruling also cites STAR Accession No. 202107020H and several Comptroller's Decisions (Nos. 112,081 (2015); 108,064, 108,065, and 108,959 (2013)) as background on what counts as inbound transportation cost.

Common questions

Q: Does the road have to be a public road to qualify?
A: No — this ruling involved privately built and maintained roads used exclusively by the taxpayer's own logging operation, not public roads.

Q: What if the road is used for other purposes too, like general forest management?
A: The ruling notes the roads were "specifically constructed and used" to access, maintain, extract, and transport the timber, even though forest management personnel might also use them for planning purposes — the primary extraction/transportation purpose supported the COGS treatment.

Q: Can any business with private access roads claim this same COGS treatment?
A: Not automatically. A private letter ruling binds the Comptroller only for the specific taxpayer and facts described in the request. A business with different facts — for example, roads not directly tied to moving goods to its own production facility — should get its own guidance rather than assume the same result applies.

Citations and references

Statutes and rules:

• Tex. Tax Code § 171.1012(a)(1) (definition of "goods")
• Tex. Tax Code § 171.1012(a)(2) (definition of "production")
• Tex. Tax Code § 171.1012(c), (d) (costs includible in cost of goods sold)
• Tex. Tax Code § 171.1012(c)(4) (inbound transportation costs)
• Tex. Tax Code § 171.1012(c)(6) (depreciation)

Cited prior guidance:

• STAR Accession No. 202107020H (2021) — inbound transportation cost guidance
• Comptroller's Decision No. 112,081 (2015)
• Comptroller's Decisions Nos. 108,064 and 108,065 (2013)
• Comptroller's Decision No. 108,959 (2013)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MAR
• Opinion: https://star.comptroller.texas.gov/view/202502030L

Original ruling text

February 28, 2025

RE: Private Letter Ruling No. PLR20221205113518

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated November 30, 2022. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on whether the costs of road construction and maintenance for logging operations qualify as cost of goods sold (COGS) for the margin calculation for Texas franchise tax.

Facts Presented

The facts presented are based on the Private Letter Ruling request and emailed information dated July 24, 2023, provided for review by **.

** is the reporting entity of a combined group consisting of itself and its affiliate, ** (collectively referred to as Taxpayer). Both entities seek to rely on this Private Letter Ruling response. Taxpayer harvests timber for wholesale lumber distribution and manufactures windows. Taxpayer owns and manages over two million acres of timberland across several states, including California, Washington, Wisconsin, and Oregon. Taxpayer processes most of the timber it harvests, and it sells the lumber wholesale or uses it to manufacture residential windows.

Taxpayer initially constructs permanent logging roads to allow access to the timber property. It then identifies areas of timber that are ready to be extracted and constructs temporary spur roads to allow direct access to the timber for heavy machinery, logging personnel, and logging trucks that are used during the extraction process. The logging personnel use heavy machinery, such as tree fellers to cut down the trees, and load the timber on logging trucks to transport the raw timber to Taxpayer’s lumber mill for processing. While the permanent roads provide long-term access to various timber properties, the temporary spur roads are constructed for timber extraction in designated areas and are no longer maintained once extraction is complete. Although the logging roads may be used by forest management personnel for timber management and harvest planning, the roads are not public roads and are specifically constructed and used by Taxpayer to access, maintain, extract, and transport the timber.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Do the costs of constructing and maintaining logging roads qualify as cost of goods sold (COGS) for the margin calculation under Section 171.1012 (Determination Of Cost Of Goods Sold)?

Ruling: Yes, the costs incurred by Taxpayer for the construction and maintenance of logging roads qualify as COGS under Section 171.1012(c)(4) related to inbound transportation costs and 171.1012(c)(6) for purposes of the Texas franchise tax margin calculation.

Analysis: Section 171.1012 addresses the determination of COGS for purposes of calculating Texas franchise tax and defines “goods” as real or tangible personal property sold in the regular course of business. Section 171.1012(a)(1). Production means construction, manufacture, development, mining, extraction, improvement, creation, raising, or growth. Section 171.1012(a)(2). The lumber and windows that Taxpayer produces and sells are tangible personal property.

Under Section 171.1012, a taxable entity may include in COGS all direct costs of acquiring or producing goods and certain costs in relation to the goods. Sections 171.1012(c) and (d). Specifically, Section 171.1012(c)(4) states that COGS includes costs attributable to inbound transportation. Inbound transportation costs can include the cost of dispatching trucks, loading and unloading shipments, depreciation on trucks and equipment, the costs of fuel, insurance, labor and similar costs incurred in transporting goods from a vendor to a taxpayer, or between a taxpayer’s storage facilities. See STAR Accession No. 202107020H (2021), citing to Comptroller’s Decisions Nos. 112,081 (2015), 108,064 and 108,065 (2013), 108,959 (2013). Additionally, Section 171.1012(c)(6) allows depreciation reported on the federal income tax return in COGS to the extent associated with and necessary for the production of goods.

There is no question that when Taxpayer extracts and processes the timber into lumber and windows, Taxpayer is producing goods that it sells. The ability of the Taxpayer to move the timber from the extraction site to its manufacturing facility requires properly constructed logging roads. Similar to transporting goods between a taxpayer’s storage facilities, here Taxpayer transports the timber from the extraction site to the next step in processing, its manufacturing facility, which is operated by a member of the combined group. Therefore, as the costs to construct and maintain the logging roads are attributable to the transportation of goods to its manufacturing facility for processing of the timber and windows, the costs qualify as inbound transportation costs under Section 171.1012(c)(4).

Additionally, the logging roads provide access to, and are necessary for the extraction and production of the lumber and windows. Therefore, to the extent Taxpayer depreciated the costs for the construction and maintenance of the logging roads on its federal income tax return, those costs can be included in COGS under Section 171.1012(c)(6).

The Texas Tax Code and Texas Administrative Code are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. PLR20230712120955.

Sincerely,

Tax Policy Division – Direct Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1 Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.