Texas Supreme Court Upholds Business Tax Raising $5.8 Billion Over 2 Years

The Texas Supreme Court upheld a state business tax projected to raise $5.8 billion over the next two years in a case in which opponents said the measure was unconstitutional because it wasn’t approved by voters.

The court ruled today that the 2006 tax isn’t a tax on individual income so it doesn’t violate a law requiring voters to approve new state income taxes.

The franchise tax will raise $5.8 billion over the next two years, about 8.6 percent of the state’s general revenue, Texas Comptroller Susan Combs said in January. It’s expected to be the state’s second-biggest revenue generator behind the sales tax, which makes up almost two-thirds of collections, she said in a report.

The tax code being challenged was enacted in 2006 and required for the first time limited partnerships and some unincorporated associations to pay a franchise tax.

Attorneys representing Allcat Claims Service LP, an insurance adjuster in Boerne, Texas, petitioned the Texas Supreme Court on July 29, arguing the tax represented an income tax on some partnerships. Since 1993, Texas has required a popular vote to add a state income tax.

The Texas high court said today that individual partners do not own partnership income and profits while they remain in the partnerships hands.

Tax Changes

Jim Martens, an attorney for Allcat, said that while the ruling was a disappointment for his client, it could lead to changes in tax code that are fair for businesses.

“The decision in so many words says it doesn’t matter if it’s an income tax, it’s constitutional because Texas follows the separate legal entity concept of partnerships,” Martens said in a phone interview. “In our next legislative sessions, the Legislature can get rid of the margin tax and substitute a true net income tax.”

The case is Allcat Claims Service LP v. Susan Combs, Comptroller of Public Accounts of the State of Texas, 11-00589, Texas Supreme Court (Austin).

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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