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Texas Court Keeps Franchise Tax on Partnerships

The Texas Supreme Court recently ruled that a business tax does not violate the state constitution and cleared the way for lawmakers as they attempt to change the tax in 2013.

The tax enacted in 2006 was the first in the state to require partnerships to pay a franchise tax, according to Bloomberg. The tax is not meeting expectations, and raising only about $4 billion a year for schools, prisons and other functions. Texas gets most of its revenue from property taxes, but since property values have been down, the state has had a revenue shortfall.


An insurance adjuster claimed that the tax acted like an income tax on some partnerships. In Texas, voters must approve of any new income taxes. The court found that a business tax does not apply to the partners in a partnership and the tax can stand.


This is good news for tax reform groups who think the Texas Supreme Court’s decision broadens the legislature’s ability to change the tax. Lawmakers had been waiting for a decision on the tax’s constitutionality before taking up tax reform in the legislature, according to the Austin American-Statesman.


Texas law has required a popular vote to enact a state income tax since 1993. The franchise tax came about after a 2005 Texas Supreme Court ruling declared the state’s education finance system was unconstitutional.


After the state’s Supreme Court ruling, the legislature slashed property tax rates and closed a loophole that allowed some businesses to avoid the franchise tax by changing how they were formed. The original idea was that the expanded franchise tax would make up for the changed property tax, according to the Fort Worth Star-Telegram.


The new wider-ranging franchise tax hit smaller businesses. An insurance claims adjusting company called Allcat Claims Service sued the state’s comptroller’s office saying the tax amounted to an income tax on individual partners. Some small firms argued the franchise tax is complicated and puts a costly compliance burden on businesses.


The Star-Telegram also reported that school systems are suing the state again because the financing system is creating unconstitutional inequities.


The court disagreed by a vote of 7-2. One of the dissenting opinions stemmed from the state legislature’s insistence that any challenge to the tax go directly to the high court and that the court be required to address it within 120 days. Justice Don Willett ruled that the court would overstep by acquiescing to the mandate.


Seth Wilburn writes for the The Gomez Firm, a Dallas employment lawyer and Dallas business lawyer. To learn more, visit http://www.gomezlawyers.com.