American Airlines’ Texas Tax Case Will Test Reach of Federal Law

American Airlines Inc.‘s decade-long challenge to Texas’ franchise tax will give a branch of the state appeals court the chance to determine, for the first time, whether it runs afoul of a federal law limiting state taxation of air travel.

The state comptroller is asking the Texas Court of Appeals, Fifteenth Judicial District, to hold that the franchise tax isn’t a tax “on” gross receipts—which would be preempted and barred by the federal law—but instead uses those gross receipts as part of the calculation of the tax.

The trial court rejected that approach, ordering the state to refund Fort ...