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Once more with the margins tax and the Supreme Court

Here we go again.

The Texas Supreme Court could blow a hole in the state’s budget if it finds the business tax unconstitutional, as pressed Tuesday in a lawsuit led by food giant Nestlé USA.

“The Legislature can’t violate the constitution to promote even a legitimate interest,” said attorney Peter A. Nolan, arguing on Nestlé’s behalf that the tax violates a state constitutional requirement that taxes be equal and uniform.

If the Supreme Court throws out the law, the scope of the court’s decision will determine whether the state needs to quickly find another way to come up with some $4.5 billion annually or more.

“Should they rule for the plaintiff, they could throw out the tax in its entirety. They could require the state to provide four years of refunds, which is the statute of limitations period,” said Dale Craymer, president of the business-based Texas Taxpayers and Research Association. The business tax “is about 10 percent of all the taxes the state collects. It’s a sizable part of the budget,” Craymer said.

The court could, however, give the state some leeway to come up with a remedy, he said. It must rule in the case by Oct. 23, according to court staff.

See here, here, and here for some background. The Statesman gives November 9 as a rule-by date. Regardless, there will be a decision this year. The Lege was likely to tweak the margins tax anyway; they may wind up having to do a lot more than that. The Trib explains the legalities involved.

Dale Craymer, president of Texas Taxpayers and Research Association, says the suit boils down to questions over equal treatment.

Craymer explains the franchise tax charges one-half of 1 percent to wholesalers but a full 1 percent to businesses engaged in manufacturing. Nestle, a national manufacturer and wholesaler, does not manufacture anything in Texas, but is still subject to the 1 percent rate.

The company claims the distinction violates equal protection provision in the Texas and U.S. constitutions.

Texas designates Nestle and the other companies in the suit as “unitary entities,” or companies that have various components but operate as one organization. Unitary entities are subject to the 1 percent tax rate under current franchise tax rules that were revised in 2006.

Texas has had a version of the franchise tax since the 19th century. Sometimes called the margins tax, it’s a tax on doing business in Texas. Craymer says the dollars it brings in “generally pale in comparison to property and sales tax” on businesses.

Lawyers for the Texas Attorney General’s Office wrote in a brief to the court that Nestle’s equal-protection challenges hinge on an erroneous premise that the franchise tax was solely meant to cover the value of doing business in Texas and that the value should be assessed as if it were property. But, they wrote, the Legislature has wide latitude to create tax classifications.

My first impression when I read that was that Nestle’s argument sounds a lot like the one Amazon had made to argue that they weren’t subject to the sales tax in Texas because they didn’t have a “physical presence” in the state, just a distribution center. They eventually lost that fight as we know, but I couldn’t say what might happen here. Between this and the school finance lawsuits, the Supreme Court will have a big say over what Texas’ budget looks like in the coming years.

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