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Tax Update - November 29, 2011
Texas Supreme Court Rejects Challenge to Validity of Texas Franchise (Margin) Tax
On Monday, November 28, the Texas Supreme Court released its decision addressing the challenge to the validity of the Texas franchise tax raised in Allcat Claims Service L.P. and John Weakly v. Susan Combs, Texas Comptroller of Public Accounts, and Greg Abbott, Texas Attorney General.
The Court held that the tax did not violate the Bullock Amendment, which requires voter approval of any tax imposed on the "net incomes of natural persons," because Texas has adopted the entity theory of partnerships. The Court also determined that it lacked jurisdiction to review Allcat's claims that the Comptroller's application of the tax violated the "equal and uniform" provisions of the Texas Constitution.
The decision considered Allcat's claims that (1) the Texas franchise tax on limited partnerships' income is an unconstitutional personal income tax in violation of the Texas Constitution's Bullock Amendment and (2) the state comptroller's application of the tax violates the state constitution's mandate that taxes be equal and uniform. Pursuant to a statute granting the Court original and exclusive jurisdiction to hear constitutional challenges to the franchise tax, Allcat requested a judgment declaring the tax unconstitutional on its face or as it has been applied to Allcat. The Court ruled that it had original jurisdiction to decide the facial constitutional challenge and concluded that the Texas franchise tax is not an unconstitutional personal income tax because Texas recognizes the entity theory of partnerships. Although the Court declined to decide whether the Texas Legislature has the constitutional authority to confer original jurisdiction on the Court for deciding whether the franchise tax statute is constitutional "as applied," the Court resolved the "equal and uniform" challenge by holding that the Legislature had not granted the Court original jurisdiction over challenges to how the Comptroller assesses, enforces, or collects the franchise tax.
On October 19, 2011, Nestle USA, Inc. and others filed a separate petition for declaratory and injunctive relief challenging the constitutionality of the franchise tax. Unlike the Allcat petition, Nestle's petition did not address the Bullock Amendment at all. Instead, Nestle claimed the franchise tax violates the Equal and Uniform Taxation Clause of the Texas Constitution and the Equal Protection Clause of the U.S. Constitution, both facially and as applied to Nestle, as well as the Due Process, and Commerce Clauses of the U.S. Constitution "as applied." Because Nestle's arguments are not framed as challenges to how the Comptroller assesses, enforces, or collects the franchise tax, Nestle will likely argue that the Court's decision in Allcat should not prevent the Court from finding that it has original jurisdiction to review all of Nestle's arguments. The Court has set oral arguments in the Nestle case for January 2012.
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