In its recent decision in IBM Corp. v. Department of Treasury, the Michigan Supreme Court ruled that taxpayers may apportion their tax base for the Michigan Business Tax using the three-factor apportionment method provided by the Multistate Tax Compact instead of the single-factor apportionment method the Michigan Business Tax statute provided. The decision means that many business that pay the Michigan business tax may be entitled to refunds. It also may impact ongoing litigation regarding whether taxpayers may apportion the Texas franchise tax base using the Multistate Tax Compact’s three-factor apportionment method. We discuss the Michigan decision in further detail and provide an update on the similar ongoing Texas franchise tax litigation below.
Major Texas Franchise Tax Policy Change: Comptroller Gives Up on the “Physical Change” Rule for Subcontractor Exclusion and COGS Deduction
The Texas Comptroller recently published a very significant policy letter to the Comptroller’s online database. The letter announces a significant change in Texas franchise tax policy that could affect entities even only somewhat involved with the design, construction, remodeling, repair, or industrial maintenance of real property. The Comptroller’s previous policy was that only entities that physically changed real property could qualify for certain beneficial provisions that could significantly reduce an entity’s Texas franchise tax. The Comptroller has now dropped its physical-change requirement. Now, an entity’s activity must only have “a reasonable nexus” with real-property design, construction, remodeling, repair, or industrial maintenance to qualify.
Supreme Court to review three state tax cases
The United States Supreme Court has already announced that it will review three state tax cases in its upcoming term — Comptroller v. Wynne, Direct Marketing Association v. Brohl, and Alabama Department of Revenue v. CSX Transportation, Inc. This is unusual as the Supreme Court rarely reviews state tax cases. While none of these cases involve Texas tax law directly, they address federal constitutional issues that may impact the Texas sales tax and Texas franchise tax. We summarize each of these cases below.
Texas Comptroller appeals taxpayer’s margin tax win in Titan Transportation
The Texas Comptroller filed a petition for review with the Texas Supreme Court, asking it to overturn the Third Court of Appeals’ decision in the taxpayer’s favor in Titan Transportation, L.P. v. Combs. That decision rejects the Texas Comptroller’s narrow, restrictive interpretation of the revenue exclusion for certain payments to those who perform work on real property in favor of the taxpayer’s more expansive view. Our earlier post on the Titan case describes that opinion in more detail (Note that Seay & Traphagan does not represent Titan Transportation, L.P. and had no involvement in this case). The Comptroller’s petition for review is available here.
This means that the Third Court of Appeals’ decision is not final. The Third Court of Appeals’ decision will become final if the Texas Supreme Court decides not to review it — the Texas Supreme Court’s review is discretionary, meaning that, like the United States Supreme Court, it only reviews cases that it chooses to review. The Texas Supreme Court may also decide to review the case and issue its own decision.
We will post updates on any further developments in the Titan case to this blog.
Introducing Seay & Traphagan, PLLC: State Tax Attorneys
I am very pleased to announce that Amanda Traphagan has agreed to join me as co-owner of the firm. We are now Seay & Traphagan, PLLC: State Tax Attorneys. Amanda has served our clients well for the past year, and I have no doubt that she will continue to provide stellar service in her new role.
Seay & Traphagan will continue to focus its practice on Texas state tax law, particularly the Texas franchise tax and Texas sales and use tax, as well as the other taxes and fees administered by the Texas Comptroller. We will continue to serve clients in all situations that may require the assistance of a Texas tax attorney, including Texas tax audits and other disputes with the Texas Comptroller.
As always, if you have any questions about Texas tax law or otherwise require the services of a Texas tax attorney, please feel free to call us at (512) 582-0120, or email us at info@seaytaxlaw.com.
Taxpayers’ first appellate margin tax win becomes final
The Third Court of Appeals’ decision in Combs v. Newpark Resources, Inc. became final today, marking Texas taxpayers’ first appellate margin tax win. The Texas Comptroller did not file a timely appeal with the Texas Supreme Court, so the Third Court of Appeals issued its mandate today. The opinion, originally handed down this past December, rejects the Texas Comptroller’s narrow interpretation of the Texas franchise tax’s cost of goods sold deduction in favor of the taxpayer’s broader interpretation of the taxing statute. Our earlier post on the Newpark case describes its holdings in more detail (Note that The Seay Law Firm does not represent Newpark Resources, Inc. and had no involvement in this case.).
We still don’t know whether the Texas Comptroller will appeal the Third Court of Appeals’ other Texas franchise tax decision in the taxpayer’s favor, Titan Transportation, L.P. v. Combs. The Texas Comptroller has until Monday, April 28, 2014 to file a timely appeal of the Titan decision with the Texas Supreme Court. That opinion, issued last month, rejects the Texas Comptroller’s narrow, restrictive interpretation of the revenue exclusion for certain payments to those who perform work on real property in favor of the taxpayer’s more expansive view. Our earlier post on the Titan case describes that opinion in more detail (Note that The Seay Law Firm does not represent Titan Transportation, L.P. and had no involvement in this case.).
Another Taxpayer Win in Texas Margin Tax Case
The Third Court of Appeals’ recent opinion in Titan Transportation v. Combs is another big win for taxpayers under the revised Texas franchise tax (also known as the Texas margin tax). In opinion, the Third Court of Appeals rejected the Texas Comptroller’s narrow, restrictive interpretation of the revenue exclusion for certain payments to those who perform work on real property in favor of the taxpayer’s more expansive view.
The opinion, the court’s second under the Texas margin tax, comes on the heels of another big taxpayer win under the Texas margin tax in Combs v. Newpark Resources, which I wrote about previously. From these two opinions, it seems clear that the Third Court of Appeals is taking a thoughtful look at the Texas Comptroller’s interpretations of Texas franchise tax law, and will reject them if they do not comport with the Texas Tax Code.
I discuss the details of its opinion and its implications below.
Third Court of Appeals Expands Aircraft Sales Tax Exemption
The Third Court of Appeals’ opinion in Cirrus Exploration Company v. Combs expands the number of businesses who may purchase aircraft without paying Texas sales and use tax. In doing so, the Third Court of Appeals once again rejected a long-standing Texas Comptroller policy that imposed additional requirements not found in the Texas Tax Code or the Comptroller’s rules on taxpayers claiming a Texas aircraft sales tax exemption. I discuss the opinion and its implications in further detail below.
Third Court of Appeals First Texas Margin Tax Opinion is a Big Win for Taxpayers
The Third Court of Appeals issued its opinion today in Combs v. Newpark Resources, Inc., its first case under the revised Texas franchise tax law (also known as the Texas margin tax). The opinion rejects the Texas Comptroller’s narrow interpretation of the Texas franchise tax’s cost of goods sold deduction in favor of the taxpayer’s broader interpretation of the taxing statute.
The court made two main rulings. First, it ruled that the Texas franchise tax considers a combined group’s business as a whole when determining its cost of goods sold deduction. Second, it ruled that, when determining whether an entity qualifies for the cost of goods sold deduction because it furnishes labor or materials to a real property construction project, the appropriate definition of the word “labor” is the common, general, expansive definition of the term.
Court Declares New Tax on Small Tobacco Manufacturers Unconstitutional
A Travis County District Court judge recently found that a new tax on small tobacco manufacturers violates the Equal and Uniform Taxation Clause of the Texas Constitution in Texas Small Tobacco Coalition v. Combs, Cause No. D-1-GN-13-002414. The Texas Comptroller has appealed the judge’s decision.
The Tax on Small Tobacco Manufacturers
The Texas Legislature passed the new tax during the last legislative session in House Bill 3536. The bill levies a 2.75 cent tax on each cigarette produced by certain small tobacco manufacturers if the cigarettes are used, sold, or distributed in Texas. The tax applies only to tobacco manufacturers who did not enter into a 1998 lawsuit settlement with the State of Texas.
In 1998, the State of Texas sued the Big Four tobacco manufacturers – Phillip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard – alleging that the Big Four engaged in misleading practices. The state and the Big Four settled the lawsuit. As a result of the settlement, the Big Four must pay the State of Texas over half a billion dollars each year. Smaller tobacco manufacturers, who were not parties to the lawsuit, do not have to make these settlement payments. Only tobacco manufacturers who were not parties to the lawsuit and settlement are subject to the new tax.
For Prompt Updates on Texas Tax Law
