United States: Texas Tax Update At A Glance

It has been a fairly active first part of 2015 for Texas tax issues—legislatively, judicially, and administratively. We will provide a more thorough review in a future edition, but here are the key updates at a glance.

Recent Legislation

The 2015 Texas legislative session commenced January 13, 2015 and concluded on June 1, 2015. Legislators faced several somewhat interrelated key issues heading into the session. The current system of funding public education largely through local property taxes had once again been held unconstitutional.¹ The last time this education funding crisis occurred, the Legislature adopted the margin tax and dedicated the anticipated increase in revenue to funding public education (to reduce reliance on local property taxes and thus cure the constitutionality issues associated with funding public schools). The margin tax has since underperformed and been criticized for a number of reasons, while the reductions in local property taxes have generally vanished. The State of Texas, however, had a budget surplus of roughly $7.5 billion heading into the legislative session, largely from better than expected revenue from oil and natural gas activities in Texas over the past several years. These funds allowed the Legislature to temporarily address a portion of the problems with the school finance system by injecting additional state funds into the system while at the same time cutting local property taxes and cutting the margin tax.

To reduce property taxes, the Legislature amended the Texas Constitution to increase the school district homestead exemption from $15,000 to $25,000 for the upcoming tax year—assuming Texas voters approve it this November. ² Senate Bill 1760 would also require supermajority votes by local governments to increase property taxes. Revamping the entire property tax system was left for another day.

House Bill 32 cut the margin tax rates by 25 percent, from 1 percent to 0.75 percent for most taxpayers, and from 0.5 percent to 0.375 percent for certain retailers and wholesalers. The legislation also allows more, larger businesses to use the simplified "EZ" filing method and reduced the EZ tax rate from 0.575 percent to 0.331 percent. ³ Bills that had called for an outright repeal or phaseout of the margin tax were not enacted.

Other legislative changes included adopting a new Tax Code Chapter 163 to specify how the Texas sales tax applies to the use of certain airplanes in Texas, ⁴ requiring certain network broadcasting companies to apportion certain margin tax receipts based on the legal domicile of the broadcaster's customer, ⁵ and modifying the Texas Enterprise Zone incentive program to emphasize the creation of new jobs in Texas. ⁶

Recent Cases

The Texas courts have been fairly active during the first part of 2015. In a July 28, 2015 decision that is unlikely to end the litigation on this matter, the Third Court of Appeals in Austin affirmed a trial court decision ruling that the taxpayer, Graphic Packaging, was required to use the single-factor formula based on gross receipts for apportionment purposes and denying the taxpayer's claim that it was entitled to use the Multistate Tax Compact's alternative three-factor apportionment formula. ⁷ Also in the margin tax area, the Austin Court of Appeals recently held that a company in the business of "renting-to-own" tangible personal property qualified for the 0.5 percent margin tax rate as a retailer essentially engaged in selling merchandise (as opposed to renting). ⁸ In a different case, the court held that a movie theater was entitled to a margin tax cost of goods sold deduction for costs associated with showing a movie, reasoning that the development and exhibition of a film constitutes the acquisition or production of a good (tangible personal property), thus satisfying the statutory requirement. ⁹ In the sales tax area, the Court of Appeals struck down provisions in the Texas Comptroller's refund rule purporting to require taxpayers to submit transactional detail and supporting documentation at the time a refund claim was initially filed, reasoning that such requirements exceeded the statutory requirements. ¹⁰ We will cover these and other judicial developments in a future edition.

New Administration

The most noteworthy administrative development during the first part of 2015 occurred on January 2, 2015, when former Texas state senator Glenn Hegar was sworn in as the Texas Comptroller of Public Accounts, replacing outgoing Comptroller Susan Combs, who had held the office since 2007. Comptroller Hegar is a sixth-generation Texan farmer from outside of Houston. Hegar is a self-styled "vigilant steward of Texas tax dollars." ¹¹ In his prior offices as a legislator, Hegar oversaw all state and local revenue matters, was instrumental in prior tax cuts of $1 billion, and has said that individuals, not government, will make better decisions with their hard-earned tax dollars. Hegar made significant changes within the Comptroller's Office leading up to his inauguration. ¹² His administration has already made improvements to the manner of considering changes in Comptroller rules, as well as improvements to the process of reviewing proposed administrative decisions from administrative law judges at the State Office of Administrative Hearings.

Watch for further details on these and other Texas updates in a future edition.

Footnotes 

1. The underlying issue is how can Texas fund the public school system in compliance with the Texas Constitution.  In August 2014, the Travis County District Court once again held that the system for funding public education violates several provisions of the Texas Constitution.  The Texas Taxpayer & Student Fairness Coalition et al. v. Michael Williams, Commissioner of Education, et. al, Cause No. D-1-GN-11-003130, Final Judgment (Travis Cty. Dist. Ct. Aug. 28, 2014), appeal pending.  The Court enjoined further funding under the system until the constitutional infirmities are corrected.  The injunction is stayed pending the appeal.  The decision reaffirms the results in several prior lawsuits, and foreshadows what legislative reforms may ultimately be required to pass muster.  The issue facing the 2015 legislature, as was the case by its predecessors, was whether to reform the system entirely or just make enough changes to forestall the issue until another time.

2.  S.B. 1.

3.  The Legislature allowed businesses with revenue of up to $20M to use the EZ method, up from the $10M under prior law.

4.  S.B. 1396.  This issue had led to numerous disputes between taxpayers and the Comptroller.  The Comptroller's Office engaged in a series of meetings with interested taxpayers, ultimately resulting in Senate Bill 1396.

5.  H.B. 2896.

6.  S.B. 100.

7.   Graphic Packaging Corp. v. Hegar, No. 03-14-00197-CV (Tex. App.—Austin July 28, 2015, no pet. hist.).

8.  Rent-A-Center, Inc., v. Hegar, No. 03-13-00101-CV (Tex. App.—Austin June 13, 2015, no pet. hist.).

9.  American Multi-Cinema, Inc. v. Hegar, No. 03-14-00397-CV (Tex. App.—Austin April 30, 2015, no pet. hist.).

10.  Hegar v. Ryan, LLC, No. 03-13-00400-CV (Tex. App.—Austin May 20, 2015,  no pet. hist.).

11.  http://www.window.state.tx.us/about/bio.php.

12.  For example, Hegar brought in Karey Barton to serve as the Associate Deputy Comptroller over the Tax Division, which includes audit, tax policy, taxpayer services, revenue administration, and other key divisions of the Comptroller's Office. Barton previously served in key roles under former Comptrollers John Sharp and Carole Keeton Rylander and worked primarily in private practice as a Texas tax consultant during the tenure of Comptroller Combs.  While serving on the staff of the Texas Tax Reform Commission, Barton worked with industry leaders to develop the "margin tax" that replaced the former franchise tax. His experience working with industry representatives  in development of the margin tax and as a consultant seems to be carrying over to working with industry in developing legislation and tax administration at the agency. Others who served in the Combs administration and continue to serve under Comptroller Hegar, including Deputy Comptroller Mike Reissig and Chief Settlement Officer Tony Luna, have similarly indicated a renewed focus toward working with industry representatives to streamline processes and encourage roundtable discussion of proposed rule changes.

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