Margin Tax Ruled Constitutional By Texas Supreme Court

On Nov. 28, 2011 in the Allcat Claims Service L.P. and John Weakly (Allcat) case the Texas Supreme Court ruled that the Texas franchise tax, often referred to as the margin tax, is a constitutional tax.

The court ruled that a tax on business partnerships and associations was not a tax on the personal income of the partners and therefore did not violate the so-called Bullock Amendment to the constitution which requires approval by voters before a personal income tax can be levied.

The ruling not only eliminates the constitutional uncertainty over the margin tax, but also opens the door to legislators to levy a true business income tax. TSCPA member Jimmy Martens, attorney-at-law and CPA, who argued the case before the Supreme Court on behalf of Allcat provided us with a short explanation of the court’s decision (.PDF). A brief news account of the decision can be found in the Austin-American Statesman.

In addition to claiming the margin tax violated the Bullock Amendment, Allcat claimed that the Comptroller’s interpretation of certain franchise tax provisions violates Allcat’s right to equal and uniform taxation under the Texas Constitution. The Supreme Court denied jurisdiction over this matter and referred it to the District Court in Austin. Read the entire court decision here.

There is another margin tax constitutional challenge before the Supreme Court. The suit was filed by Nestle USA, Inc., Switchplace, LLC and NSBMA LP (Nestle) claiming that the margin tax violates the Equal and Uniform Clause of the Texas Constitution as well as the Equal Protection Clause, the Due Process Clause and the Commerce Clause of the United States Constitution. Oral arguments are set for Jan. 12, 2012 in that case. At least one news article speculated that the Nestle case will be referred to the Austin District Court. For more details and reference to the case filings visit the TSCPA Government Affairs Blog.

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