Two of the three judges on the Texas Court of Appeals have agreed with the arguments of American Airlines (AA, Dallas/Fort Worth) in a legal fight with the State of Texas over whether the state can make the airline pay a franchise tax on its air transportation revenues.

The carrier argues that the tax violates a federal law called the Anti-Head Tax Act (AHTA), while the Texas Comptroller (the state’s tax authority) insists this is a margin tax, not a tax on revenue, and should not be blocked by federal law. The lawsuit concerned American’s Texas franchise tax report for 2015, covering fiscal year 2014.

American contended that its revenue collected from baggage fees, passenger fees, and freight transportation was not subject to the Texas franchise tax because the authority of Texas to tax transportation revenue was preempted by the AHTA.

A lower court had previously agreed with American Airlines. It ordered Texas to refund over USD100,000 and rejected the state’s attempts to collect another USD1.8 million in franchise taxes for 2014. Now the Court of Appeals has to decide whether to uphold the refund or allow Texas to tax those earnings.

Between 2009 and 2014, the Comptroller agreed with American’s position, but it later changed its position. It sought an opinion from the US Department of Transportation (DOT) that the AHTA did not preempt the franchise tax. The DOT disagreed with the tax authority.

Dallas/Fort Worth is American Airlines’ main hub, accounting for 15% of its overall capacity, ch-aviation data shows.