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Supreme Court upholds margins tax

The days of the much-unloved business margins tax may be numbered, but it won’t be the Supreme Court that is responsible for its demise.

The Texas Supreme Court turned back a challenge to the state’s primary business tax, saying it doesn’t violate a constitutional ban on personal income taxes.

The Constitution allows personal income taxes only when if voters approve. Lawmakers didn’t seek voter approval when they revised the franchise tax in 2006, and Allcat Claims Service LLP and a limited partner there, John Weakly, sued for a refund from the state, calling it an illegal personal income tax and saying that it wasn’t applied in an equal and uniform way. In the majority opinion, written by Justice Phil Johnson, the court answered one of those questions:

“We hold that: (1) the tax is not a tax imposed on the net incomes of the individual partners, thus it does not facially violate Article VIII, Section 24; and (2) we do not have jurisdiction to consider the equal and uniform challenge.”

More from the Statesman:

The case focused on whether the franchise tax constituted an income tax for certain business partnerships, including many medical practices and law firms.

Allcat Claims Service LP, a Boerne insurance adjustment firm that filed the case last summer, argued that the franchise tax levied against the partnership reduced the income of Allcat’s partners, making it an income tax.

But a majority of the court maintained that the tax applied to Allcat, not the business partners, so it did not run afoul of a state constitutional provision that prohibits a personal income tax unless voters give their approval.

“In effect, the court said a business is a business, and restrictions against taxing persons do not apply. That gives the Legislature a broader range of options in revising the tax,” said Dale Craymer , president of the Texas Taxpayers and Research Association, a business-backed think tank.

[…]

Monday’s decision will not, however, affect a separate challenge to the margins tax that was filed by food behemoth Nestle USA Inc. and two other companies this fall.

But Craymer said the court decision implies that that case will be sent to a trial court because it deals with specific rather than broad issues.

I was surprised we got a decision so quickly, but apparently the legislation that created the margins tax had a provision that said a challenge to it would go straight to the Supreme Court and that it must render a judgment within 120 days. I fully expect the 2013 Lege to address the margins tax in some fashion, but at least they won’t be under the gun of having to make it constitutional. We’ll see if they actually try to fix the budget’s structural deficit by making it bring in more revenue.

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3 Comments

  1. […] The main reason – other than it’s working as designed – that the court didn’t strike down this law is because it likely would have forced a special session to remedy this law. And it’s hard to imagine our current legislature being able to produce anything better then this disaster. Kuff has more, Supreme Court upholds margins tax. […]

  2. […] year the court upheld the margins tax as constitutional in a separate case filed by Allcat Claims Service LP. Assuming this is on the same mandated 120-day […]

  3. […] here, here, and here for some background. The Statesman gives November 9 as a rule-by date. Regardless, there […]

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