Issue Position: Defend Texas Taxpayers

Issue Position

Margin Tax

An Unfair, Unconstitutional Income Tax That Skews School Finance

* The margin tax is unconstitutional
o Texas Constitution Article VIII, Section 24(a), known as the Bullock Amendment, requires a statewide referendum on a tax on natural persons' income including a person's share of partnership or unincorporated association income [1]
o Income tax: A tax imposed on or measured by net income, including an amount arrived at by deducting expenses from gross income (one or more forms of which expenses are not specifically and directly related to particular transactions). [2]
o The margin tax is an income tax. [3]
o The margin tax violates the Bullock Amendment. [4]
* The margin tax is unfair
o The margin tax is based on gross receipts less either: (i) cost of goods sold as defined in the statute (COGS); or (ii) compensation.
o The taxpayer may elect to utilize the COGS or compensation deduction. However, service industries that do not sell or manufacture tangible goods (e.g., utilities, professional services) are limited to the compensation deduction.
o The COGS deduction favors certain companies without rational basis. [5]
+ The COGS deduction is materially broader than the compensation deduction. For example, certain costs that are common to virtually all businesses are deductible under COGS but not under compensation. Examples include depreciation, rent, insurance, utilities and property taxes.
+ The COGS deduction includes compensation of all employees (and in some cases independent contractors) directly involved in acquiring or producing goods. Therefore, businesses electing the COGS deduction may in some cases also be entitled to deduct most of their compensation expense.
+ Businesses electing the COGS deduction may in turn elect annually whether to include inventories in the COGS computation. The inventory option enables businesses under COGS to elect each year whichever route yields the lowest tax. Such inventory election is unique to the margin tax. For federal tax and financial accounting purposes, as well as income tax purposes in other states, businesses having merchandise or manufacturing inventories must include inventories in their COGS computations each and every year.
* The margin tax is no financial solution and skews school finance
o First year (2008) margin tax collections totaled $4.5 billion -- far below the $5.9 billion expected. No one could explain why. The tax shortfall will skew school finance. [6]
o The margin tax has caused substantial expense and unfair havoc to taxpayers.
+ Since the margin tax COGS definition differs materially from the federal tax or financial accounting definitions, businesses electing the COGS deduction must maintain separate books for this purpose.
+ Various provisions of the margin tax are ambiguous, and many of these matters have not been clarified. These issues give rise to uncertainties regarding preparation of margin tax returns. Additional issues likely will arise during audits.
+ "In the 2009 Senate version of the bill, which was the version finally enacted, businesses with total revenue less than $600,000 will get a permanent exemption, and those with revenue from $600,000 to $1 million will get a two-year tax break." [7]

[1] April 21, 2006 Comptroller Letter to Attorney General Abbott citing Article VIII, Sec 24(a) of the Texas Constitution: "A general law enacted by the Legislature that imposes a tax on the net incomes of natural persons, including a person's share of partnership and unincorporated association income, must provide that the portion of the law imposing the tax not take effect until approved by a majority of the registered voters voting in a statewide referendum held on the question of imposing the tax."
[2] Comptroller Letter Ibid citing Article II, par 4 of the Multistate Tax Compact adopted by Chapter 141, Texas Tax Code, and in effect at the time of adoption of the Bullock Amendment.
[3] April 21, 2006 Comptroller's letter to Attorney General Abbott. The sections relating to COGS deduction and compensation deduction "clearly include indirect and overhead costs of production and/or compensation that make the margin tax an income tax."
[4] Comptroller Letter Ibid.
[5] Comptroller Letter Ibid.
[6] Billy Hamilton, State Tax Notes, February 16, 2009, pp. 523-527, 525. By June 8, 2009, State Tax Notes, vol. 52, no. 10 reported that the tax "has accomplished the difficult feat of both angering thousands of taxpayers and producing $1.8 billion less than the state had expected in its first year."
[7] Billy Hamilton, State Tax Notes, June 8, 2009, p. 856.

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