Texas Franchise (Margins) Tax
July 30th, 2008
This is the first year that many of us have dealt with the new Texas Franchise Tax, a.k.a. the Margins Tax. The tax on its face sounds innocent enough, just 1%. The reality as many of you have come to know is that this 1% is of your gross revenue with very few deductions (employee costs or cost of goods sold). As a result, it is possible to have a loss in the business and still have to pay the franchise tax. It has happened in certain service industries like transportation and forwarding. Some industries received some breaks, including retain, physicians and lawyers. The original purpose of the change was to bring all business entities under the tax. (Limited Partnerships and others we excluded under the prior law.)
Unfortunately as with most things the pendulum has swung to far and will need to adjust (hopefully sooner than later). I have some ideas on fixing this problem but I would like your input and comments. I intend to put together a simple plan provide revenue for the government that is equitable, without becoming an burden unfair burden on businesses.
As for my thoughts I suggest that the tax focus on the net income for the business for federal tax purposes. By doing this we can simplify preparation of the tax returns for the included businesses and allow all industries to be treated on equal footing. This will remove any bias for one industry or another, because the net amount is what is being taxed. I would also recommend a flat tax rate that would start after the first $300,000 of net income for federal tax purposes.
These are just some of my preliminary thoughts, I welcome and encourage you to comment on this blog. Your feedback is important to me. I may include your ideas or thoughts in my letter to Governor Rick Perry and the Texas Legislature. (Your anonymity can be assured is you like.) You can email me at jmd@dickersonlaw.com.
Until Next Time.
1 Comment Add your own
1. SKW | July 31st, 2008 at 11:07 pm
We, the business community, feel asleep and didn’t catch what the government was doing. Now that its done we need to get them to at least fix it so that it mitigates the burden on small business. Your proposal of a minimum thresh hold of NET income would be a very good start. Removal of this tax would be better, however unlikely.
What the underlying problem at hand is that Texas is seeking new revenue streams to augment the services expenditures that they are now “obligated” maintain. When the economy is doing good the money comes in without much problem so government sought out new ways to expand its service to “help” its constituents, however when the economy turns south, and revenue is not as bountiful cutting services is not something that any legislator wants to go on record for advocating. But rather find new sources of money. At this point and time it would be much more prudent to get the state to tighten its belt and encourage conservation and promote departments to sharpen their pencils. Promote and reward departments that come in under budget, not punish them for saving money. Evaluate services to remove duplication of services.
That’s my two cents.
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