TSCPA members are certainly no strangers to the myriad problems with the revised Texas franchise tax, but it looks like other business groups are taking notice as well.
In today's Quorum Report, editor and TSCPA friend Harvey Kronberg files the following report.
FOUR ASSOCIATIONS JOIN NFIB IN CALL TO FIX MARGINS TAX
Group even advocates a special session
In the face of what they believe is unfair treatment of small businesses in Texas, the leadership of the state chapter of the National Federation of Independent Business called today for a series of reforms in the new business margins tax that would blunt the tax’s impact on its members.
Among the reforms highlighted today at a press conference were many that were debated but not included in the original 2006 legislation creating the tax or the cleanup bill passed last session. Those include measures exempting non-profitable businesses from the tax, allowing businesses to deduct money paid to contract laborers, halving the margins tax rate for businesses with less than $20 million in gross receipts and requiring a two-thirds vote for lawmakers to raise the margins tax rate.
Another proposal to exempt more businesses from the margins tax was substantially different from past iterations. NFIB originally backed a straight-up exemption for businesses making less than $1 million. In the final legislation, lawmakers included a lower exemption of $300,000 but included a "stair step" approach in which businesses would pay a graduated portion of the tax until revenues hit $900,000. NFIB again suggested today that the full exemption be raised to $1 million. Will Newton, NFIB-Texas’ executive director, said that businesses should pay on a graduated scale beyond that. For example, businesses making between $1 million and $1.5 million would pay 20 percent of the tax, those making between $1.5 million and $2 million would pay 30 percent of the tax and so on.
Finally, the NFIB proposed that for businesses that paid into the old franchise tax system, the amount owed on the new tax should be no more than double the highest tax bull under the old system.
Joining the NFIB in the call for business tax reform was: the Independent Electrical Contractors of Texas, the Texas chapter of the Air Conditioning Contractors of America, the Texas Courier & Logistics Association and the Plumbing-Heating-Cooling Contractors of Texas.
It remains to be seen whether these proposals will gain traction or whether they will remain non-starters. A big concern for lawmakers would have to be balancing the books. The reforms proposed above would take revenue away from the state. Lawmakers would presumably have to find money elsewhere to pay for the reforms.
Newton said he was more concerned by what he thought was lawmakers’ lack of attention to the effects of the new tax. In a survey of its members, NFIB reports that a little more than half of the respondents said they were paying more under the new margins tax than the old franchise tax. More than a third said they experienced an increase of up to 200 percent in their tax bill over the old system; slightly more than that said they experienced an increase greater than 500 percent.
Several business owners at today’s press conference also said the rules on the new tax were only recently finalized and that many of their accountants don’t seem up to speed yet on the rules. Between the higher tax bills and the confusion over how to file the new tax, the old franchise tax system – reviled as it was – is looking better and better. In the NFIB survey, nearly three-quarters of the respondents said they’d prefer to pay the old tax.
"I think it’s a boondoggle that has nailed small business to the wall," said Kurt Summers, chairman of NFIB-Texas’ Leadership Council. "And we need to let our legislators know we’re not happy and we’re not tolerating it, all the way to the top. I think we need to let our Governor know he needs to fix this."
Gov. Rick Perry could call a special session to address reform of the margins tax. Newton did not go so far as to ask Perry for a special session but said in a press avail afterward that he wasn’t ruling out doing so. "We can come back and fix this thing," he said.
Perry spokeswoman Allison Castle said this afternoon that the new business tax has yet to be collected, so "they’re putting the cart before the horse." Lawmakers will have the opportunity to make necessary changes next session, she said. The Governor backed changes in the business tax because it ensured that more businesses paid into the system so it was the right thing to do, she said.
Meanwhile, she said that Perry has voiced support for changes in the tax if the revenue raised is substantially greater than anticipated or if there are "unintended consequences on segments of the economy."
Chris Cutrone, a spokesman for Speaker Tom Craddick, said that several members have voiced concerns over the business tax issue. "We are here to listen," he said, adding that a Business Tax Advisory Committee was studying the effects of the new margins tax on Texas businesses.
Lt. Gov. David Dewhurst spokesman Rich Parsons said, "Until the state collects the tax, it’s premature to discuss what changes might be necessary. But the Lieutenant Governor is watching the issue closely and as with any tax, he wants to ensure it is as low as possible and fair and equitable to everyone."
Having prepared several hundered franchise tax returns I feel that there are significant flaws in defining cost of sales and compensation. The restrictive definitions should be expanded to include contract labor in many instances. Under current rules a transporatation company that pays drivers on a contract basis cannot deduct its most significant cost - driver compensation. The state's answeres to frequently asked questions speaks directly to this and specifically denies the deduction. There are many businesses that provide services as well as product sales. Yet they must choose cost of goods sold or compensation. A harsh result particuarly when combined businesses are integrated and one sales products and the other provides service. One example would be an optometrist that provides medial services and also sales eyeglasses and accessories. The franchise tax provides an disincentive to vertically integrate by making a company choose one or the other method. All of us understand that this legislation was hastily written under a fast approaching deadline. All of us are anxious to see the revisions that will surely be forthcoming to remove the inequities and flaws of the current margin tax rules.
Posted by: Mark A. Christy | November 13, 2008 at 03:47 PM