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The Texas Supreme Court upheld the imposition of the franchise tax (often referred to as the Texas Margins Tax) under both the Texas and United States Constitutions. In Re Nestle USA, Inc., No. 12-0518 (Tex. 2012) (opinion delivered Oct. 19, 2012).

Nestle argued that the imposition of the franchise tax was unconstitutional, both facially and as applied.  In Texas, the franchise tax rate is 1%, except for those taxpayers “primarily engaged in a wholesale or retail trade,” for whom the rate is 0.5%. Nestle was engaged only in wholesale and retailing activities in Texas, but because it was engaged in manufacturing outside of Texas, it was subject to the 1% franchise tax rate rather than the lower wholesale/retail rate. Specifically, Nestle argued that the differential rate based on the wholesale/retail classification was unconstitutional under the Equal and Uniform Clause of the Texas Constitution and the Equal Protection, Due Process, and Commerce Clauses of the United States Constitution because the tax lacked a reasonable relationship with actual business in Texas and because of the fact that the tax is higher for those with a manufacturing business outside of Texas.Continue Reading That’s the Way the Cookie Crumbles: Nestle Loses Its Battle on the Constitutionality of the Texas Franchise Tax

Companies that provide financing to customers in Texas to purchase and lease equipment may be shocked to learn that their interest expense may not be deductible as a cost of goods sold (“COGS”). In Texas, a “lending institution” that offers loans to the public is authorized to subtract an amount equal to their interest expense as COGS. Tex. Tax Code Ann. § 171.1012(k) . However, it is unclear what the phrase “loans to the public” means.

A recently released Policy Letter Ruling did little to clarify this, and only muddied the waters further regarding what “loans to the public” means when a multi-state financial services company provides loans for the purchase or lease of a related affiliate’s equipment. The ruling denied the deduction of interest expense as a COGS to a wholly-owned finance subsidiary that qualified as a “lending institution” and was engaged in the business of financing heavy construction equipment sold or leased by its parent company to unrelated third-party customers. Tex. Pol. Ltr. Rul. No. 201101133L (Jan. 6, 2011) (released July 2011). A qualifying “lending institution” includes an entity that makes loans and is regulated by a federal regulatory authority, the Texas Department of Banking, Office of Consumer Credit, Credit Union Department, Department of Savings and Mortgage Lending. Tex. Tax Code Ann. § 171.0001(10).Continue Reading “Loan” Star Mishap: Texas Muddies Water on Interest Expense Deduction for “Loans to the Public”

On July 29, 2011, a petition was filed with the Texas Supreme Court seeking a declaratory judgment that the Texas margins tax (TMT) is unconstitutional. Regardless of whether the Texas Supreme Court will strike down the TMT in its entirety, the court’s decision could have significant implications for many corporate taxpayers. 

 

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The Texas Comptroller of Public Accounts (Comptroller) took a “members only” approach to determine how revenue derived from website access fees should be sourced to Texas for Texas Franchise Tax apportionment purposes. In Letter No. 201102989L (Feb. 2, 2011), the Comptroller considered the sourcing of revenues derived from a company’s social networking website. The social networking website allowed registered users to pay a flat fee to access the website’s database, publish information, communicate with other users, and utilize and interact with the website’s programs. The Comptroller concluded that such fees were akin to membership fees because customers were charged a flat rate for certain benefits and thus should be sourced to the location of the payor.Continue Reading Texas “Tweets” Guidance on Sourcing Social Networking Website Revenue

In a continuing effort to clarify certain Texas Margins Tax issues, the Texas Comptroller of Public Accounts (Comptroller) issued Tax Policy News in July 2010, which provides additional guidance on the Texas Margins Tax costs of goods sold computation; apportionment; and margin tax recovery fees. Texas statutes and regulations do not provide significant guidance on how these provisions should be applied. 

Regarding the costs of goods sold deduction, the Comptroller clarified that this deduction may only be taken by taxpayers that produce “goods,” i.e., real property, tangible personal property, and specifically enumerated services related to video and radio programming. To the extent a taxpayer sells “mixed transactions”—transactions containing elements of both a “good” and a service—the taxpayer may only subtract as costs of goods sold those costs “in relation to” the good. However, a taxpayer may nonetheless deduct as costs of goods sold up to 4% of its back-office (“indirect or administrative overhead”) costs allocable to “the acquisition or production of goods.”Continue Reading Texas Margins Tax Roundup: Comptroller Provides Additional Margins Tax Guidance