TSCPA Governmental Affairs

TSCPA Testifies at Sunset Advisory Commission Hearing

A number of years ago the legislature initiated a pilot project designating the Texas State Board of Public Accountancy (TSBPA) a self-directed, semi-independent (SDSI) agency. This allows TSBPA to operate outside the legislative appropriations process, setting its own budget based on license and examination fees and requiring TSBPA to pay $700,000 per year into the state’s general revenue fund (GR). The state continues to exercise oversight through reporting, state audits and controling the funds through the State Comptroller’s office.

The pilot program authorizing SDSI is currently being reviewed by the Sunset Advisory Commission (SAC) to determine if the program should be renewed.  SAC staff recommended continuation of the program (PDF) with certain modifications, inlcuding some additional reporting to the state and the transfer of all administrative fines to GR. Since December 2011 all administrative fines levied by TSBPA have been transferred to the Fifth-year Accounting Scholarship fund.

TSCPA’s Chair, Fred Timmons and CEO John Sharbaugh sent a letter to SAC supporting the staff recommendations and immediate past-chair, Donna Wesling, testified on behalf of TSCPA supporting the SAC staff recommendations at a hearing in Austin yesterday.

The commission will be making a final determination on the proposal and will hold a decision-making hearing on December 18-19, 2012.

CPA Serves on House Interim Committee on Texas Response to Federal Sequestration

CPA and TSCPA member Rep. Charles Perry (R-Lubbock) has been appointed to serve on the new Interim Committee to investigate the affects of the impending Federal Sequestration on the Texas economy.

The Committee, appointed by Speaker Joe Straus (R-San Antonio) today will study how the sequestration process will affect the defense industry in Texas, the state budget, public and higher education and the tax burden on Texas families and businesses. The Committee will also develop specific legislative proposals.

The committee will be chaired by Rep. Linda Harper-Brown (R-Irving) with Rep. Mike Villarreal (D-San Antonio) appointed as vice-chair. Other members of the committee are Rep. Cindy Burkett (R-Mesquite), Rep. Brandon Creighton (R-Conroe), Rep. Dawnna Dukes (D-Austin), Rep. Craig Eiland (D-Galveston), Rep. Dan Flynn (R-Van), Rep. Naomi Gonzalez (D-El Paso), Rep. Jodie Laubenberg (R-Parker) and Rep. Eddie Lucio III (D-Brownsville).

Find more information in the Straus press release.

Few Surprises on Election Day

For the seasoned political observer, there were few surprises on Election Day. While the presidential popular vote was very close, many pundits were not surprised by the Democratic dominance of the Electoral College. You can make up your own mind about why what happened in the presidential race – too many variables for this observer to contemplate, let alone explain, the day after the election.

The Republican failure to make progress in the US Senate was also predictable after two of the supposed-to-win candidates put their proverbial foot in their mouth making offensive comments about rape and unwanted pregnancy; once again - not a surprise.

The Republicans had such a large majority in the US House that not even the most optimistic Democrat expected that to change; completely predictable. The Texas congressional races went pretty much according to the incumbent party except for one modest surprise. In CD 23 Democratic candidate Pete Gallego (a sitting Texas House member) upset incumbent Republican Francisco Conseco. It was only a modest surprise because Conseco’s district had been changed this time around and he knew he was in for a genuine contest.

Texas has four more seats in the Congress this election due to population growth. The new seats split three for Democrats and one for Republicans. The new Texas delegation to the US House of Representative will include 24 Republicans and 12 Democrats compared to 23 and 9 last year.

In those Texas statewide races (Supreme Court Justices, Appellate Court Judges and Railroad Commissioners) everyone knew the Republicans would sweep. About the only statewide question is whether the new State Board of Education make-up is more or less conservative than the last one, and I can’t help you on that one.

The Texas Senate ended with the same number of Republicans and Democrats as the last session, 19 Rs and 12 Ds. Republicans hoped to defeat Sen. Wendy Davis (HD 10 – Fort Worth) but Rep. Mark Shelton came up short. The district was drawn to be a Republican district, but Davis’ popularity in Fort Worth carried the day. It was clearly the most competitive race in the state and I’m guessing one of the most expensive. All the other races fell along party lines as expected. The Senate will likely be more conservative than last session with four new senators decidedly more conservative than those they replaced. Sen. Mario Gallegos (D-Houston) died shortly before the election, too late to remove his name from the ballot, and he won. A special election will be held in January to fill the vacant seat which will undoubtedly go to a Democrat.

With more conservative senators, the question of eliminating the two-thirds rule will again be in play. The Senate rules require a two-thirds majority to bring a bill to the floor for debate. The rule allows the minority party to have more clout and forces a more collegial atmosphere; it is designed to reduce partisanship. Some Republicans don’t like the rule or the premise. The rule was discussed before the last session with some suggesting changing it to sixty percent rather than two-thirds. Of course sixty percent would mean the Republicans could bring bills to the floor without any Democratic support, so it is tantamount to eliminating the rule. The last two sessions Republicans did change the rules to provide exceptions to the two-thirds rule for certain specific legislation, such as Voter ID. That could happen again this session if the rule stays intact.

Republicans enjoyed a 102-member State House of Representative super majority in the last legislative session, but absolutely no one expected that too continue. Democrats picked up seven seats so they are still outnumbered 95-55 which sounds like only a marginal improvement for Democrats. But it does mean the Republicans have to get at least five Democrats to agree to pass anything requiring a two-thirds majority (such as proposed constitutional amendments). It also means the Republicans can’t have a quorum without some Democrats present.

The Republicans could have ruled the House during the last session without a single Democratic vote - or even presence - but Speaker Joe Straus was reluctant to use the two-thirds majority like a club. Republicans used the club about twice during the session. Democrats complained so vociferously that Straus wouldn’t allow the tactic again for the rest of the session. Straus first became speaker in the 2009 session with the support of the Democrats in a successful effort to unseat the existing Speaker, Tom Craddick (R-Midland). With Straus’ reluctance to use the club, losing the club is not as big a deal as it might have been.

The next potential for surprise would be the Speaker’s race. The House members elect their speaker on the first day of the legislative session. Straus was challenged last session by Ken Paxton (R-McKinney) to no avail. There was a lot of fanfare, but Paxton never was anywhere near the votes to unseat Straus. Paxton has moved on to the Senate, but in his place Bryan Hughes (R-Mineola) announced, even before the election, that he was challenging Straus for the speakership. There is no doubt that with about 40 new House members, there will be a few more anti-Straus members than last session, but odds are still in Straus’ favor. It takes 76 members to elect a speaker. Straus has run for speaker on the platform of allowing the members to dictate the House agenda and has allowed members to have their say in most situations; it’s hard to imagine most of the Democrats abandoning Straus in favor of Hughes. If you assume all the Democrats will vote for Straus (and I realize the dangers of assumptions), he only needs 21 Republicans to vote for him. While the assumption will likely not be accurate, it points out the hill Hughes has to climb to be competitive. If Straus is defeated for Speaker – now that will be a surprise!

Regardless of who is Speaker, the House will likely be more conservative than last session. More conservative Republicans were elected and even if Straus is the Speaker, if he lives up to his promise for his leadership to reflect the will of the House, it will be a more conservative House. If the 83rd Texas Legislature is more conservative than those in the past, is that a good thing or a bad thing? You have to decide that one.

Texas Supreme Court Says the Margin Tax is Constitutional, again

In its second ruling on the Texas margin tax, the Supreme Court of Texas has once again ruled the tax constitutional. The case was brought by Nestle USA, Inc.

In this case one of the main controversies was the two different tax rates -- .5% for retailers and wholesalers and 1% for everyone else. Nestle argued that the two rates meant the tax was not applied in an equal and uniform manner. The state argued that it is exactly this difference that makes the tax equal and uniform. The court agreed with the state.

The plaintiff further argued that the tax was applied unfairly because Nestle has only retail and wholesale operations in Texas but is taxed as a manufacturer because it has manufacturing operations in other states. The court also rejected this argument saying Nestle’s Texas operations benefited from the company’s manufacturing.

There was a minority opinion that the court should not hear the case but rather send it to a lower court. Read the court’s opinion.

With the legislative session fast approaching, legislators can heave a collective sigh of relief since they won’t be forced to readdress the franchise tax issue.

Details of 10/18 PCAOB meeting in Houston

The Public Company Accounting Oversight Board (PCAOB) has released some details about the hearing to be held in Houston later this week.

In addition to addressing topics raised at previous meetings, the 10/18 event will include discussion of practical challenges related to firm rotation (and any factors that might mitigate, or exacerbate, them); the role of the audit committee in enhancing auditor independence and professional skepticism; and the potential impact of approaches other than rotation on professional skepticism. In addition, academics will discuss research pertinent to the issues raised in the concept release.

Click here for the PCAOB's full press release.

Supreme Court Hears Franchise Tax Case

Today the Supreme Court heard Nestle’s arguments that the franchise tax is unconstitutional because it ignores the state constitution’s requirement that taxes be “equal and uniform.” One of the main controversies is the two different tax rates; .5% for retailers and wholesalers and 1% for everyone else. The state argues that it is exactly this difference that makes the tax equal and uniform. Nestle has only retail and wholesale operations in Texas but is taxed as a manufacturer because it has manufacturing operations in other states. This is Nestle’s second try at the Supreme Court. The first was dismissed on a technicality. For more read Texas High Court Hears Franchise Tax Challenge. The court could rule before the beginning of the January legislative session. A ruling in favor of Nestle would have significant implications for state revenues as the tax is expected to raise $5.5 billion in revenues this year.

TSCPA Member Sen. Tommy Williams to Chair Senate Finance Committee

Lt. Gov. David Dewhurst announced yesterday that Sen. Tommy Williams, CPA will chair the Senate Finance Committee.  Williams is currently serving as chair of the Senate Transportation and Homeland Security committee and has served on the Finance committee during his senate tenure.  Dewhurst also announced that Sen. Robert Duncan would continue to chair the State Affairs committee and Sen. Jane Nelson would continue to chair the Health and Human Services committee.  All three senators have been mentioned in the past as candidates for the powerful Finance committee post.  Having a CPA chairing the Finance committee is good for the state and the CPA profession.  Read the Dewhurst press release here. 

Franchise Tax Constitutionality is Back Before the Texas Supreme Court

Nestle, once rebuffed by the Texas Supreme Court on a technicality, has refiled its claim that the Texas franchise tax is unconstitutional.  With the technicality remedied, Nestle now hopes the court will hear the case on its merits.  Nestle’s challenge revolves around the different tax rates for retailers and wholesalers (.5%) versus all other businesses (1%).  While Nestle is a manufacturer, it has only retail and wholesale operations in Texas.  Nevertheless, it must file as a manufacurer.  Nestle’s contention is that the rate differential is unconstitutional.  Oral arguments have been set for Sept. 18, 2012.  Here are links to the various briefs.

Nestle’s brief

The State’s reply

Nestle’s rebuttal to the State’s reply

Taxpayer Wins Franchise Tax Refund

In the continuing franchise tax controversy over who can deduct cost of goods sold and what can be deducted, one taxpayer was successful in challenging the Comptroller’s audit report in court and received a complete refund of taxes paid under protest. Newpark Resources, Inc., a fully-integrated oil field services company, objected to the Comptroller’s dis-allowance of certain cost of good sold deductions related to oil field waste disposal.

Newpark’s suit raised several different grounds challenging the assessment. They include:

1. Whether Newpark may deduct the costs of the waste disposal segment as a cost of goods sold because the waste disposal segment is an integrated part of Newpark’s unitary business;
2. Whether the waste removal segment of Newpark’s business independently qualifies for the cost of goods sold deduction because it furnishes labor and materials to real property construction projects;
3. Whether Newpark is entitled to exclude from revenue its payments to barge companies for transporting the scrap mud to the disposal sites; and
4. Whether Newpark may calculate its 4% limitation for indirect costs based upon the total indirect administrative costs incurred by all members of Newpark’s combined group.

Click here (PDF) to view a copy of Newpark’s petition, filed July 21, 2011. Click here (PDF) to view a copy of the judgment, filed July 2, 2012.

For more information, please contact Jimmy Martens, Lacy Leonard or Amanda Traphagan with Martens, Todd & Leonard, the attorneys litigating this case.

Comptroller Susan Combs Announces New “Fresh Start” Amnesty Program

“From June 12 through August 17, 2012, the Texas Comptroller of Public Accounts will waive penalties and interest for businesses that file delinquent tax reports and pay all taxes due, or amend reports that under-reported taxes and pay the taxes due. Reports originally due before April 1, 2012, are eligible for this limited amnesty. The amnesty is available for all state and local taxes and fees administered by the Comptroller's office, with the exception of Public Utility Commission gross receipts assessments. Sports and community venue tax and property taxes are not administered by the Comptroller and are not eligible. The Unclaimed Property program is not a part of tax amnesty.”

For more details check the Fresh Start Amnesty Program for 2012.