Strategic Property Tax Advisors, commercial property tax consultants, advalorem taxes

History
In 2006 the Texas Legislature enacted sweeping changes to the longstanding Texas franchise tax. House Bill No. 3, passed by the Legislature and signed by Governor Rick Perry, has become law and is effective for reports filed on or after January 1, 2008. Like other taxes that are based on activity during a period prior to the report year, the tax reaches back to 2007, and even earlier for some taxpayers.

The margin tax is part of a larger tax reform agenda designed to respond to the Texas Supreme Court's ruling in Neeley v. W. Orange-Cove Consol, Independent School District, 176 S.W.3d746 (Tex. 2005) (related to school funding), to offer voters a property tax reduction, and to address certain school related provisions. The legislation subjects additional businesses to the franchise tax and fundamentally changes the way the tax is calculated.

Currently
As in effect prior to the new margin tax, the franchise tax is imposed only on corporations (as defined in the Texas Tax Code)and limited liability companies, and is imposed on a separate entity basis. As a practical matter, that tax is the greater of 0.25 percent of an entity's adjusted (as required by the Texas Tax Code) GAAP net worth or 4.5 percent of adjusted (again, as required by the Texas Tax Code) federal taxable income plus officer and director compensation, in both cases as apportioned to Texas.

The New Margin Tax
The margin tax statutory provisions, like the "old" franchise tax ones, comprise Chapter 171 of the Texas Tax Code¹. While the new tax incorporates many provisions from the prior law, the margin tax differs from the "old" franchise tax in several material respects.

It applies to additional business entities
It has a different starting point (revenue)
It requires combined reporting for many entities
It is imposed at a rate of 1.0 percent (0.5 percent for wholesale and retail sellers)
It allows deductions from revenue for either (a)cost of goods sold or (b)compensation,m in both cases, as apportioned to Texas.

Minus:

Either:

(a) Cost of Goods Sold, or

(b) Total Cash Compensation ($300,000 per person limit) and Employee Benefits

(Note: Election between cost of goods sold and compensation deduction may be changed on an annual basis and applies to all members of combined reporting group, each of which computes its revenue and deductions separately)

Equals:

Gross Margin (but not to exceed 70 percent of Total Revenues)

Mulitiplied By:

Texas Apportionment Factor (Texas Gross Receipts divided by Total Gross Receipts - so retains the single-factor formula used for the old Texas franchise tax, but without throwback rule.

Equals:

Taxable Margin

Multiplied By:

One Percent Tax Rate (or 0.5 percent Tax Rate, for Wholesalers and Retailers)

Equals:

Tax Payable

(a) subject to special rules for smaller taxpayers/lower receipts: taxpayers with total revenue of less than or euqal to $300,000 (with CPI adjustments for later years) or total tax liability of less than $1,000 are not required to pay the tax; and

(b) the tax may be reducted by certain already accruied but unused credits, and by a credit for certain losses.

¹ Unless otherwise indicated, all chapter and section references are to TEX. TAX CODE ANN. (Vernon 2006).