Tax benefits for destination management companies

Senate Bill 636 by Senator Kel Seliger (R-Amarillo) passed the state legislature on the last day of the legislative session. The bill as originally authored requires the State Comptroller to provide certain information about taxpayers to other government entities upon request. While the bill was on the House floor, Rep. Patrick Rose (D-Dripping Springs) added an amendment which provides sales and franchise tax relief to destination management companies (DMC).

Based on information from Rose’s staff, there are only 18 such companies in Texas with most of them being small businesses. These companies solicit primarily out-of-state businesses to come to Texas for meetings and conventions, and the DMC then makes all the arrangements for the hotels, meals and activities. The client company pays the DMC and it in turn pays the companies providing the accommodations and other services.

The Rose amendment provides an exemption for sales and franchise tax revenues for payments the DMC makes on behalf of the client. Rep. Will Hartnett (R-Dallas) and Sen. Leticia Van de Putte (D-San Antonio) authored bills to provide DMC relief but Hartnett’s bill died on the House floor at the end of the session and Van de Putte’s bill never made it out of the Senate Finance Committee. The Rose amendment was basically the same as the other two bills except for some language changes to satisfy the State Comptroller that a loophole was not being created for companies other than DMCs.

This is a good example of the margin tax controversy over taxation of flow-through revenues. The margin tax law specifically excludes some types of flow-through revenue from taxable revenue, but unless one of the specific exemptions applies, other flow-through revenues are subject to taxation. During the legislative session there were a number of bills authored to provide flow-through revenue exemptions for various businesses and revenues. SB 636 was the only such bill that passed the 81st Legislature.

There were approximately 100 bills offered during the session to amend the margin tax, and they all failed except for SB 636 and House Bill 4765 by Rep. Rene Oliveira (D-Brownsville), Chairman of the House Ways and Means committee. HB 4765 raised the franchise tax revenue exemption from $300,000 to $1 million for returns filed in 2010 and 2011 and set the exemption at $600,000 for later years.

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