TSCPA Governmental Affairs

Court Ruling Allows Fixes to Franchise Tax Inconsistencies

When the margin tax became the Texas franchise tax, legislators took great pains to make sure it was not an income tax.  Those great pains caused inconsistencies in the amount of taxes paid by different industries and even taxpayers in similar businesses.  The Supreme Court’s ruling that an income tax can be levied on business entities, including partnerships and unincorporated associations, means the legislature has the opportunity to eliminate those inconsistencies.

Fixing the tax may not necessarily raise more revenue, however, and the Texas Association of Business says it shouldn’t because business taxes in Texas are already high.  CPA Rep. John Otto (R-Dayton) says, "There should be a certain amount of revenue that the franchise tax can raise without being a hindrance to business, where we can remain competitive with other states."

While not calling for a tax increase, Rep. Mike Villarreal (D-San Antonio) says that when changes are made we need to have a tax that “grows with the economy.”

You can find all of this and more as Kate Alexander reports on different views about fixing the tax in the Austin American-Statesman.

Margin Tax Ruled Constitutional By Texas Supreme Court

On Nov. 28, 2011 in the Allcat Claims Service L.P. and John Weakly (Allcat) case the Texas Supreme Court ruled that the Texas franchise tax, often referred to as the margin tax, is a constitutional tax.

The court ruled that a tax on business partnerships and associations was not a tax on the personal income of the partners and therefore did not violate the so-called Bullock Amendment to the constitution which requires approval by voters before a personal income tax can be levied.

The ruling not only eliminates the constitutional uncertainty over the margin tax, but also opens the door to legislators to levy a true business income tax. TSCPA member Jimmy Martens, attorney-at-law and CPA, who argued the case before the Supreme Court on behalf of Allcat provided us with a short explanation of the court’s decision (.PDF). A brief news account of the decision can be found in the Austin-American Statesman.

In addition to claiming the margin tax violated the Bullock Amendment, Allcat claimed that the Comptroller’s interpretation of certain franchise tax provisions violates Allcat’s right to equal and uniform taxation under the Texas Constitution. The Supreme Court denied jurisdiction over this matter and referred it to the District Court in Austin. Read the entire court decision here.

There is another margin tax constitutional challenge before the Supreme Court. The suit was filed by Nestle USA, Inc., Switchplace, LLC and NSBMA LP (Nestle) claiming that the margin tax violates the Equal and Uniform Clause of the Texas Constitution as well as the Equal Protection Clause, the Due Process Clause and the Commerce Clause of the United States Constitution. Oral arguments are set for Jan. 12, 2012 in that case. At least one news article speculated that the Nestle case will be referred to the Austin District Court. For more details and reference to the case filings visit the TSCPA Government Affairs Blog.

Comptroller Issues Second Request for Information to Preserve Temporary Credit

We reported earlier about the Comptroller’s Oct. 1, 2011 letter to the reporting entities of all combined groups that claimed a temporary credit for business loss carry-forwards on a 2008, 2009 or 2010 franchise tax report. The letter required the reporting entities to provide the name of the entity or individual that owned, directly or indirectly, more than 50 percent of all of the entities included on the combined report. The reporting entity had to also include the Texas business loss carry-forward as of Jan. 1, 2008, for each affiliate that filed a preservation form in 2008 or that was the basis of a temporary credit for business loss carry-forward claimed on the franchise tax report.  The due date for the information was Oct. 31, 2011.

Some 8,655 taxpayers did not respond to the Oct. 1 letter so the Comptroller has sent a second request to those taxpayers with a Dec. 19 deadline for responding.  Taxpayers that do not respond face the possibility of losing any future credit for their business loss carry-forwards.  For more information check out Important Information to Ensure Franchise Taxpayers Keep Their Temporary Credit.

More Chinks in the Armor?

About two weeks back we reported that Speaker Joe Straus opined “I think at some point you can’t cut your way to prosperity.”  We wondered if that was a chink in the armor of the no new taxes mantra.

This week Senator Tommy Williams (R-The Woodlands), Chairman of the Senate Transportation and Homeland Security Committee, remarked, "We've got to start having some honest conversations with our constituents about what it takes to run state government," and retiring Senator Steve Ogden (R-Bryan) suggested a voter referendum on a business income tax.  Williams stopped short of suggesting tax increases, but suggested almost doubling the vehicle registration fee.

On the other hand, John Otto (R-Dayton), House Appropriations Subcommittee Chair and Vice-chairman of the Ways and Means Committee, suggested the Margin Tax needed revision, but he didn’t agree with Ogden that we needed a referendum: "I don't think we ought to use it [Margin Tax] for the fix for the shortfall.”

All were speaking at a meeting of the Texas Taxpayers and Research Association as reported by Kate Alexander in the Austin American-Statesman.  Sen. Ogden won’t have to worry about it but Williams and Otto are seeking re-election.  Can Republicans hold such “honest conversations with our constituents “about the “shortfall” before an election?