Ever since the franchise tax was changed to the margin tax levied on all types of business entities, rumors have flown that there would be a lawsuit challenging the efficacy of the tax because some claimed the tax was an income tax levied on natural persons, specifically partners in limited partnerships or members of professional associations. The Texas constitution requires that any income tax imposed on natural persons, “including a person’s share of partnership and unincorporated association income,” must be approved by Texas voters. If the margin tax is an income tax, this important step was not taken. It has finally happened. The lawsuit has been filed.
In an interesting twist, the legislation enacting the margin tax stated that any challenges to the tax must be heard directly by the Texas Supreme Court and gave the court 120 days in which to do so. Allcat Claims Service, LP recently filed an original petition in the Texas Supreme Court challenging the constitutionality of the margin tax. When the law was passed back in 2006 the rationale for a Supreme Court trial in 120 days was so any such challenge could be quickly adjudicated before the tax actually went into effect. Five years later the rationale no longer applies but the law still does.
The law firm of Martens Seay & Todd is handling the case for Allcat and has issued a press release about the filing (PDF).