Margins Tax Challenged

On October 20, 2011, the Texas Taxpayers and Research Association filed a second petition with the Texas Supreme Court alleging the state's reformed franchise tax, commonly known as the "gross margin tax", violates the Texas Constitutional provision requiring taxes to be equal and uniform. The petition alleges:

  1. Whether the Texas franchise tax violates the Equal and Uniform Clause of the Texas Constitution, either as applied or facially.

  2. Whether the Texas franchise tax violates the Equal Protection Clause of the United States Constitution, either as applied or facially (unbriefed issue).

  3. Whether the Texas franchise tax violates the Due Process Clause of the United States Constitution, either as applied or facially.
    4. Whether the Texas franchise tax violates the Commerce Clause of the United States Constitution, either as applied or facially.

Three others are a part of the petition:

  • Nestle USA, Inc. is a company engaged in the world wide manufacture and sale of food products, has only wholesale activity in Texas, but pays the one percent tax rate of a manufacturer instead of the half percent rate applicable to wholesalers.

  • Switchplace LLC, a company providing temporary accommodation services that may not claim a “cost of goods sold” deduction, and

  • NSBMA LP, a company engaged in renting out certain types of construction equipment that may not claim a deduction for cost of goods sold, though other types of suppliers of construction equipment would qualify.

With regard to the equal and uniform provision of the Texas Constitution, the petitioners contend that the classifications the tax creates and the corresponding tax liability are not rationally related to or commensurate with the privilege of doing business in Texas. Petitioners ask the court to enjoin the Comptroller from collecting the franchise tax while awarding petitioners appropriate relief (refunds).

A copy of the petition is available on TTARA website. One of the attorneys for the relators, Jennifer Patterson Rabb, will speak on the legal issues surrounding the franchise tax at TTARA’s annual meeting November 7 & 8.

Under the provisions of the bill creating the margin tax, challenges under the Texas Constitution are to be filed in the Supreme Court, which has 120 days to decide the issue. An earlier suit, Allcat, contending that the tax violates the “Bullock amendment” personal income tax prohibition is set for oral arguments on October 24. Additional briefs have been filed in the case by the Texas Association of Realtors (in support of the state) and a CPA, Nikki Laing (in support of the plaintiffs).

One of the issues the Court is considering is whether or not the Legislature’s assignment of direct jurisdiction to the Supreme Court itself is constitutional. It is possible that the court may deny jurisdiction, requiring these cases be filed in district court—a much more time consuming process.