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Texas Tax Law: Changes Expected in 2019

  • Published on Dec 14, 2018
  • by Lacy Leonard

Our Tax Expo speaker Lacy Leonard previews her presentation in the following article.  

To hear more from her and other great speakers, register for the 29th Annual Tax Expo January 7-8th at the Sugar Land Marriott Town Square here.

The 86th regular session of the Texas Legislature will begin on January 8, 2019. With each new regular session, the Legislature begins its work with an estimate of how much tax revenue is appropriate and (hopefully) a desire to collect the least amount of tax possible to do the most good for our state. To that end, there are always a few bills filed that purport to strengthen taxpayer rights, but never quite seem to gain traction.   

For example, House Bill 150 related to “Honesty in Taxation” would prevent the use of the label “state fee” when the fee walks like a tax and talks like a tax and is paid to the state like a tax. Unfortunately, bills promoting transparency in taxation have not traditionally been prioritized by the Texas Legislature.  

Similarly, there was a House Joint Resolution proposing a constitutional amendment that would require a two-thirds vote of all members of both houses of the legislature to impose a new state tax or to increase the rate of an existing tax. This would allow businesses to more easily predict their state tax burdens in the future. As with HB 150, there has been no early indication that this measure will receive any significant attention this session either.  

The first day to pre-file bills for the 86th regular session was November 12th. By noon, over 400 bills had been filed and over 100 of those bills related to tax matters in some fashion. There were eighteen bills pertaining to sales and use tax (the overwhelmingly largest source of revenue in Texas) and three pertaining to franchise tax. 

Of the sales tax bills filed through November 30th, perhaps the most anticipated bill for in-state and out-of-state retailers is Senate Bill 70 which pertains to creating a single local use tax rate as an alternative to the combined local tax rate for remote sellers. This bill attempts to address some of the issues that the comptroller has anticipated will arise when he begins to enforce the United States Supreme Court’s decision in Wayfair v. South Dakota1 to out-of-state taxpayers seeking to decipher Texas Tax Code Chapter 151 on sales and use tax, particularly the use tax provisions. 

In the franchise tax realm, Senate Bill 66 would reduce the franchise tax rates following a five percent increase in biennial revenue estimates produced by the comptroller. Eventually, the franchise tax would expire entirely after successive rate reductions resulted in a zero tax rate. 

Obviously, if this bill were to become the law in Texas, the accuracy of the Comptroller’s biennial revenue estimates would become very important.   

According to a recent report from the Texas Taxpayers and Research Association, in 2009, franchise tax revenue accounted for over 11 percent of all state taxes collected, but since that time the 11 percent share has steadily declined by almost half to 6.5 percent in 2017. Franchise tax as a percentage of gross state product also peaked in 2008 and 2009 at 0.36 percent (soon after the changes went into effect) but has since declined to almost half that amount at 0.19 percent in 2017. The decrease in the amount of franchise tax collected by the comptroller is widely attributed to the rate reductions enacted by the Legislature in 2013 and 2015 and to continue legislative adjustments favoring small businesses, such as the tripling of the “no tax due” threshold from $300,000 to over $1 million and doubling the availability of the EZ tax rate.

A common critique of the franchise tax is its lack of clarity for businesses trying to comply with its requirements. As a result, there has been a substantial amount of litigation over the franchise tax, primarily with respect to qualification for and calculation of the limited revenue exclusions available and the COGS deduction. While several early court decisions added some clarity to these issues (Newpark2, Titan3,  CGGVeritas4 ), the comptroller has continued to pursue litigation in this area to limit the holdings in those cases.  

Currently, there are several cases pending before the Third Court of Appeals in Austin and at the Texas Supreme Court that could affect these earlier decisions. Two such cases are Gulf Copper5  and Autohaus6. These cases primarily deal with the issue of whether installation labor may be included in the COGS deduction. Autohaus was tried on cross motions for summary judgement before a Travis County district court judge, and the judge ruled in favor of Autohaus. However, that order was later overturned by the Third Court of Appeals. 

Gulf Copper was adjudicated through a one week trial on the merits in Travis County District Court. The district court judge found in Gulf Copper’s favor and entered an order allowing Gulf Copper to include installation labor expenses in its COGS deduction.  

The Court also ruled that the comptroller’s policy limiting the revenue exclusion for real property services and oil and gas contractors to contracts containing percentage based fee allocations was improper under the Titan decision, and in doing so allowed Gulf Copper to exclude from revenue payments to hourly temporary workers who supplemented Gulf Copper’s existing workforce.

In response to these decisions, the comptroller has proposed changes to Comptroller Rule 3.588 that would change the outcome of many of the cases mentioned above.  In remains to be see whether this will invite further litigation.  

In addition, to these cases there are also many cases currently pending before the Third Court of Appeals and Texas Supreme Court impacting sales and use tax. Of note are several cases dealing with when items are resold.  Alamo National v. Hegar7,  (Do hotels resell toilet paper to their guests?), CEC v, Hegar8,  (Does Chuck E. Cheese resell gaming machines to its patrons?), and El Paso Electric v. Hegar9,  (Do utility companies resell meters to customers?) are three such examples. It is possible and likely that one or more of these cases will be decided before the 86th Regular Session of the Texas Legislature comes to an end.  

As a result, we may see additional tax bills filed to address the outcomes of these cases. You can check the status of any bill that has been filed at the Texas Legislature online webpage here, as well as set up alerts for new tax bills that are filed. For any of the cases above, you can check their status here.  

1. South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018)

2. Combs v. Newpark Res., Inc., 422 S.W.3d 46 (Tex. App.—Austin 2013, no pet.).

3. Titan Transp., LP v. Combs, 433 S.W.3d 625 (Tex. App.—Austin 2014, pet. denied).

4. Hegar v. CGG Veritas Servs. (U.S.), Inc., No. 03-14-00713-CV, 2016 WL 1039054 (Tex. App.—Austin Mar. 9, 2016, no pet.) (mem. op.).

5. Hegar v. Gulf Copper and Manufacturing Corporation, 535 S.W.3d 1 (Tex. App.—Austin 2017, pet. filed). 

6. Autohaus LP, LLP v. Hegar, 514 S.W.3d 897 (Tex. App.—Austin Feb. 24, 2017, pet. filed).

7. Alamo Nat’l v. Hegar, No. D-1-GN-15-000802 (126th Dist. Ct., Travis County, Tex. Dec. 15, 2016), pet. filed, No. 13-17-00040-CV.

8. CEC Entertainment v. Hegar, No. D-1-GN-16-004422 (126th Dist. Ct., Travis County, Tex. May 2, 2018), pet filed, No. 03-18-00375-CV.

9. El Paso Electric Co v. Hegar, No. D-1-GN-17-006837 (353rd Dist. Ct., Travis County, Tex. November 5, 2018).

This is an article from Houston CPA Society's Online Magazine called the Forum. Read the full magazine here. 

About the author: 

Lacy Leonard is a partner at Martens, Todd, Leonard & Ahlrich. She represents state and federal taxpayers through all stages of a tax controversy, including audit assistance, challenging assessments, and seeking a refund of overpaid taxes.