Texas State Franchise Tax a.k.a Margin Tax is Unconstitutional

Dear Governor Perry, Attorney General Abbott and Comptroller Combs,

We the undersigned are taxable business establishments in the State of Texas who have been direly effected by the new state franchise "margin tax" law. We are petitioning you in an effort to persuade you to take a very close look at this new "margin tax" law. This tax is, in truth, an unconstitutional income tax.

Texas Constitution Article VIII, Section 24(a) requires a statewide vote on an income tax. The new business tax was enacted in 2006 during a special session called by the governor so school property taxes could be lowered. This reduction was replaced with collecting taxes on gross revenue (income) from unsuspecting businesses which violates the Texas Constitution.

The Financial Accounting Standards Board, which sets accounting rules nationally, determined that the margins tax is an income tax for reporting purposes. This was never discussed or taken into consideration before this law was passed.

As you are aware, the margin tax became effective January 1, 2008 and the auditing has final begun to implement the new changes as set out on July 2010 on the comptroller's web site as follows:

"Franchise tax audits for report years 2008 and 2009 are now in full swing, and we've noticed that many entities in the service industry are incorrectly electing to use the cost of goods sold deduction to determine margin.

"Section 171.1012 of the Texas Tax Code specifically provides that, in determining the cost of goods sold, the term "goods" means real or tangible personal property sold in the ordinary course of business and does not include services. The Tax Code does not allow a cost of goods sold deduction for entities that provide services such as dry cleaners, law firms, parking facilities, rental services, towing companies, etc. [ETC equates to literally tens of thousands of service oriented business.]

"Franchise Tax Rule 3.588(c)(8) does allow a cost of goods deduction for transactions that contain elements of both a sale of tangible personal property and a service; however, an entity may only subtract as cost of goods sold the costs otherwise allowed in relation to the tangible personal property sold.

"For example, an auto body shop offers the service of car repair and in the process of the repair, replaces some of the car's parts. If the auto body shop elects to use the cost of goods sold to determine margin, the shop can only deduct the cost of the car parts. The labor related to the repair of the car is not allowed as a cost of goods sold.

"If an entity that is not eligible for the cost of goods sold deduction elected to use this method for prior years' reports, the entity must amend the reports. The compensation deduction, however, is not available for the prior years' reports. The election language in Tax Code Section 171.101(d) does not allow a change in the method of computing margin to a cost of goods sold or compensation deduction after the due date of the report.

"These entities that originally elected to use the cost of goods sold method must amend and use the 70 percent method to determine margin or, if total revenue is not more than $10 million, may use the E-Z Computation to determine tax due. The E-Z Computation does not allow a cost of goods sold or compensation deduction in computing margin but instead applies a lower tax rate of 0.575 percent directly to apportioned total revenue."

Even at the lower tax rate, the taxes due can exceed the net profit of a business. This is truly a service entrepreneur's nightmare.

We pray that you do the constitutionally right thing and put this issue before the voters before there are longer lines at the unemployment offices.

Sincerely,

The undersigned....