News and Insights

Business Taxes Again on the Agenda as Texas Legislature Reconvenes

Tax Development Jan 23, 2007

As the Texas Legislature opened its 80th session, business taxes are once again at the top of its agenda.

Over the next five months, lawmakers are expected to consider numerous clarifications and revisions to the new franchise tax adopted last spring, residential property tax reforms, and other proposals, including one to authorize private companies to collect some taxes.

“The issues being considered will have a material impact on the bottom line at thousands of Texas companies,” said G. Brint Ryan, Managing Principal of Ryan & Company, North America’s largest independent state & local tax consulting firm. “Members of our Firm’s Public Affairs Practice will be monitoring these issues on behalf of our clients who do business in Texas.”

The new margin tax, which is effective for tax returns filed in 2008, allows taxpayers to reduce their tax burdens in Texas by deducting either “compensation” paid or “cost of goods sold.” Lawmakers will attempt to clarify those two deductions, deciding for example, whether “compensation” should include payments made to independent contractors (currently, it is not) and whether expenses like advertising and some outbound freight charges should be deductible as “cost of goods sold.” Some businesses will urge the Legislature to simplify the “cost of goods sold” deduction by scrapping the state’s definition, in favor of relying on the amount and method of calculating “cost of goods sold” that the taxpayer used for federal tax purposes.

Any change that is made will impact some businesses. The trucking industry, for example, will closely follow debate over the compensation issue because many trucking companies use drivers who are contractors, not employees. Gravel and cement companies want the deduction for outbound freight to cover the costs they incur for delivering tons of sand, gravel, and stone to job sites. And, state television stations, radio, and newspapers are partnering with the retail companies that buy advertising to lobby for the advertising deduction.

Property Taxes
More than 30 property tax bills were prefiled in Texas, proposing a variety of ways to reduce residential property taxes and appraisal increases, most by lowering appraisal caps, mandating rate rollbacks, or increasing the homestead exemption.

When tried in other states like Florida and California, these approaches resulted in substantial shifts of the tax burden to business property. All business property owners should closely follow this debate and should insist, at a minimum, that any property tax reform bill include certain safeguards to minimize the shifting tax burden.

Third-Party Tax Collectors
The Legislature again will consider whether private companies should be authorized to collect some delinquent taxes. This has been proposed before unsuccessfully, but enjoys stronger support this year. Businesses have strongly opposed this in the past and have insisted that any plan to utilize private companies to collect taxes include strict protections of confidential tax information and prohibit contingency fee arrangements.