News and Insights

Texas Governor Signs House Bill 3

Tax Development May 18, 2006

Governor Rick Perry of Texas signed House Bill 3 into law today. House Bill 3 (“HB 3”) will replace the current Texas franchise tax with an alternative margins tax, beginning January 1, 2007. While the first alternative margin tax reports will not be due until May 15, 2008, a key provision of HB 3 will affect many Texas taxpayers much sooner.

Pursuant to this provision, the Texas Comptroller of Public Accounts (the “Comptroller”) will notify certain taxpayers that they must complete and submit an information report to the Comptroller by February 15, 2007. The Comptroller will identify and require the following taxpayers to complete the information report:

  1. The 1,000 entities that paid or are required to pay the most franchise tax for the reporting period ending December 31, 2005;
  2. The 1,000 entities doing business in this state that had the greatest amount of gross receipts in 2005 for franchise tax purposes;
  3. The 1,000 entities doing business in this state with the greatest number of employees in this state, according to records maintained by the Texas Workforce Commission, in 2005; and
  4. The 1,000 entities doing business in this state with the greatest school maintenance-and-operations property tax levy in this state in 2005.

The practical effect of the information report will be to require these taxpayers to complete and file an alternative margins tax report as if the alternative margins tax had been in effect on January 1, 2006. No tax will be due with the information report and the Comptroller cannot grant any extension of the due date.

The Comptroller will provide the forms and instructions necessary to complete these reports on or after November 15, 2006 but before December 2, 2006. Taxpayers will have, at best, from November 15, 2005 until February 15, 2007 to complete the information report, and these months are often the busiest for corporate tax departments due to year-end tax provisions, Christmas vacations, etc.