TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, July 27, 2008

The Texas Margin Tax

David A. Vanderhider (J.D. 2008, St. Mary's) has published Comment, A Marginal Tax: The New Franchise Tax in Texas, 39 St. Mary's L.J. 615 (2008).  Here is part of the Introduction:

In 2006, therefore, the Texas Legislature adopted the new margin tax, which expands the outdated franchise tax. The margin tax increases the number and kind of entities taxed and, true to its nomenclature, taxes a business's margin, or revenue, instead of mere capital. The controversial nature of the new tax lies in its significant reform. Long-used methods of circumventing the franchise tax, such as business restructuring and asset reallocation, are curtailed by the margin tax. ...

Before analyzing the new margin tax, we must first understand the basic history of business taxation in Texas in order to understand how and why the state legislature has made this latest change. Furthermore, analyzing the differences between the franchise tax and the margin tax will allow greater understanding of the complicated margin tax and help Texas businesses estimate their new tax liability. By examining the policy and substance behind the changes to the franchise tax, and by comparing the margin tax with business taxes of other states, we can further anticipate problems and ponder the possible solutions to this controversial change in Texas tax law. The margin tax is both positive and problematic, and even more changes should and probably will be made before the first returns are filed. More than anything, however, the Texas Legislature and Comptroller for Public Accounts need to clarify terms, simplify instructions, and provide example calculations--in addition to the online margin tax calculations worksheet--in order to reduce the confusion and ambiguity surrounding the tax.

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I just noticed this from your weekend posts. Kudos to Mr. Vanderhider for taking on the daunting task of trying to explain the revisions to the Texas franchise tax. To add one small point (which he may have mentioned in the full article), the tax is still the franchise tax even though it's often called the "margin tax." It's still a charge for the privilege of doing business in Texas in a legal form that provides limited liability, only now that charge is based on a "taxable margin" calculation instead of on the former twin calculations of "taxable capital" and "taxable earned surplus." That will likely be an important consideration when courts have to interpret the tax in future cases.

Posted by: Alan Sherman | Jul 29, 2008 4:08:25 PM

Is COD income considered gross receipts for purposes of the Texas Margins tax?

Posted by: Cudney | Sep 9, 2008 10:32:55 AM