Monday, Oct. 24th the Texas Supreme Court heard oral arguments in the Allcat Claims Service case challenging the constitutionality of the margin tax. Each side in the case had 30 minutes to present arguments and much of that time was taken up by the lawyers responding to questions from the Justices. Ample evidence was submitted to demonstrate that Bob Bullock definitely was trying to require a referendum if the legislature wanted to levy an income tax on personal income, including partnership income. Most of the arguments were centered on whether or not the state could tax a partnership as a separate business entity without running afoul of the Bullock Amendment. Other statutes were cited in support of the separate entity theory amid the question of whether Bullock got it right in the amendment, even if his goal is clear.
There was very little argument about whether or not the margin tax is an income tax. TSCPA member Jimmy Martens, speaking for Allcat, pointed out that all income taxes are taxes on gross revenue less statutory allowed deductions; just like the margin tax. There didn’t seem to be any attempt to counter that argument with the state’s attorney concentrating on the business entity taxation premise.
Towards the end of the session, in response to a question from the bench, Martens offered the possibility of a judicial remedy that is only prospective. Evidently there is precedent for such a solution based on the Carrollton-Farmer’s Branch ISD v. Edgewood ISD Supreme Court ruling. The prospect of requiring the state to refund at least millions to partnerships with natural persons as partners during a time of fiscal distress for the state must be daunting to the Justices. Perhaps opening the door to only fixing the future will keep the fear of the results from unduly influencing the legal outcome. Martens has provided TSCPA with this explanation of the judicial rationale to support a prospective-only ruling.
If you are interested in the proceedings, you can hear the complete one hour, seven minute recording here.