Allstate Claims Service, L.P., which is based in Boerne, has filed a lawsuit alleging that the business margins tax is an illegally-passed income tax in Texas. Oh, boy.
Nikki Laing, a CPA and third-year Baylor law student, studied the structure of the tax for a Baylor Law Review article titled “An Income Tax By Any Other Name is Still an Income Tax.” She believes it’s just what the plaintiffs say it is: an income tax.
“Despite the name being a margins tax, if you look at it closely, it is in effect an income tax. You start with your gross revenue and you deduct certain statutory deductions,” Laing said. “It fits the comprehensive definition of an income tax, which is revenue less expenses.”
Rep. Jim Keffer, R-Eastland, said it’s not an income tax because businesses can get hit with it even in years when they don’t have net income (one of the chief complaints critics leveled at the tax when it was created).
“This is not an income tax per se; this is a gross receipts with deduction capabilities,” Keffer said. “And you’re taxed whether you have income or not, or profits so to speak.”
It’s not an academic proposition. Under a provision in the Texas Constitution, known as the “Bullock Amendment” because it was championed by the legendary former Lt. Gov. Bob Bullock, no income tax can be passed in Texas without voter approval. The 2006 overhaul was not submitted for approval by Texas voters.
That’s the basic contention in the lawsuit — that the Legislature passed an income tax without getting the necessary voter approval. The lawsuit asks that the state stop all “attempts to enforce, collect, and assess this unconstitutional tax.”
What surprises some tax experts is that it has taken so long for someone to sue on the ground that it’s an income tax. Perry angered many fellow conservatives when he signed the “margins tax” into law, but he fought for exemptions in the law and resisted all attempts to raise taxes to deal with a huge budget shortfall earlier this year.
“I think all the tax practitioners in the state have been waiting for this shoe to drop,” said tax attorney William Grimsinger, who blogged about the lawsuit in a recent column. “The ability [to sue] has has been out there for a while. This is really the first time anybody has done it.”
Osler McCarthy, a spokesman for the Texas Supreme Court, said that under special provisions in the 2006 law, any challenge of its constitutionality goes straight to the high court. He said the court will be required to render a ruling by late November, almost six years to the day after the court ruled that the current school finance system was unconstitutional.
“The filing is direct in the Supreme Court, so you bypass the trial court and the courts of appeal,” McCarthy said. “That makes this one different.”
Here’s Grimsinger’s blog post, which mostly recaps the story of the margins tax and the timeline for the Supreme Court; he thinks they’ll rule before Thanksgiving. As we know, the margins tax has helped create a structural deficit in the state’s budget, since it doesn’t collect enough to pay for the 2006 property tax cut. If it gets thrown out, then as was the case with the West Orange-Cove lawsuit that led to its creation, the Court will presumably give the Lege a deadline for addressing the problems of the margins tax, or to come up with some alternate source of revenue to replace it since the budget would then be out of balance. Can you imagine how much fun that will be?