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State and Local Tax Blog

SALT Blawg – State and Local Tax Blog

State and Local Tax ("SALT") blog issues require state and local tax knowledge. Chamberlain Hrdlicka's SALT Blawg (SALT Blog) provides exactly that knowledge with news updates and commentary about state and local tax issues.

You can expect to find relevant information about topics such as income (corporate and personal) tax, franchise tax, sales and use tax, property (real and personal) tax, fuel tax, capital stock tax, bank tax, gross receipts tax and withholding tax. SALT Blawg, offers tax talk for tax pros … in your neighborhood.

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Margin Tax Under Challenge: Suit filed in Texas Supreme Court to Challenge Whether the Texas Margin Tax passes muster under the Constitution of the State of Texas

 by William Grimsinger

On July 29, 2011, suit was filed in the Texas Supreme Court alleging that the Texas Margin Tax is unconstitutional under the Constitution of the State of Texas because: (1) it imposes an income tax on a natural person’s share of partnership income without voter approval (contrary to the Bullock Amendment) and (2) the Comptroller’s interpretation of the tax violates the equal and uniform taxation clause of the Texas Constitution.

Under the original Margin Tax statute passed in 2006, any challenge to the tax statute must be brought in the Texas Supreme Court and that court must rule on the challenge on or before 120 days from the challenge.

From the filing date of July 29, 2011, the Texas Supreme Court must issue a ruling on or before November 26, 2011.  November 26, 2011 falls on a Saturday, so it is likely that the Texas Supreme Court would have until Monday, November 28, 2011 to issue its ruling.  However, Thanksgiving falls on Thursday, November 24, 2011.   Given the holiday weekend, it is likely that the Texas Supreme Court will issue its ruling by mid-November if not earlier.

The timing of this challenge to the Texas margin tax is interesting in that the Texas Legislature just completed a legislative session in which substantial cuts to the state’s budget were required due to a shortfall in revenues.  Following the session, several school districts indicated that they would be filing suit again to challenge the Texas school funding system as unconstitutional.

A similar suit filed by the West Orange Cove Consolidated Independent School District was decided by the Texas Supreme Court in 2005.  In that decision, the Texas Supreme Court affirmed the lower court ruling that the school funding system did not meet constitutional requirements.  However, the Court gave the Texas Legislature until June 1, 2006 to remedy the system.  In response, the Texas Legislature enacted the Texas Margin Tax.

With this challenge and with suits by school districts again contemplated, we have come full circle.  The Texas Legislature attempted to put off the difficulty of tax reform for two years in enacting the recent 2011 to 2013 budget, but it appears that this challenge or perhaps challenges by the school district may force action sooner.