Texas’ main business tax does not violate the state constitutional ban on a personal income tax, according to a ruling by the Texas Supreme Court in late November.
The Texas Legislature created the business tax, also known as the margins tax, in 2006 as a part of a court-ordered fix for school funding. It is a major source of revenue for public education and other services, although it has raised far less money than originally projected. The state estimated the tax would raise almost $12 billion in the 2008-2009 budget but it brought in less than $9 billion.
Texas has had a constitutional ban on personal income tax without voter approval since 1993. Boerne-based insurance adjuster Allcat Claims Service LP filed the lawsuit challenging the business tax, arguing it acts as a personal income tax when applied to certain business partnerships. According to the lawsuit, Allcat asserted that “the franchise tax is a tax on the net incomes of its partners.”
The Comptroller argued that “the franchise tax is not an income tax because it can result in taxes due even if the entity loses money …whether the tax is an income tax is irrelevant because Texas has adopted the entity theory for partnership law and a tax imposed on a limited partnership entity does not constitute a tax on the net income of the partnership’s individual partners.”
Allcat argued the separate entity theory only applied to property ownership and enforcement liability, not to net income.
The all-Republican state Supreme Court rejected that argument, ruling limited partnerships can be taxed as an entity and a not a collection of individuals. “Simply put, under Texas law the entity theory applies to partnership income and profits,” the court stated.
(Jim Vertuno of the Associated Press contributed to this article.)
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